Fitch Ratings has downgraded
The Outlook on Provident's Long-Term IDR is Negative.
KEY RATING DRIVERS
The downgrade principally reflects Fitch's expectations that Provident's consumer-credit division (CCD) will not return to profitability in the medium term due to impact from the pandemic and increasingly restrictive regulation in the high-cost credit sector. As a result, Provident's franchise and business model will be less diversified as it will continue to rely on its non-standard credit-card subsidiary (
Provident's ratings also consider
CCD reported a
In addition, regulatory developments in 2H20, in particular the
Provident's wholesale borrowing declined in 2020 following the
Provident's funding base is well-diversified and includes retail deposits (at
The ratings of Provident's senior unsecured notes are in line with the group's Long-Term IDRs, reflecting Fitch's expectation of average recovery prospects.
ESG - Social Impacts: Provident has an ESG Relevance Score of '4' each for Exposure to Social Impacts and Customer Welfare stemming from a business model focused on high-cost consumer lending. This exposes the group to shifts of consumer or social preferences and to increasing regulatory scrutiny, in particular on loans to low-income individuals. This has a moderately negative influence on the pricing strategy, product mix, and targeted customer base.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Further adverse developments from the pandemic or regulatory developments in the
Prolonged measures capping interest rates, constraining new lending or debt servicing and therefore eroding earnings capacity.
Significant deterioration of solvency as manifested in reduced regulatory capital headroom with capital ratio approaching regulatory capital requirement.
A notable weakening of liquidity profile.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The Outlook on the Long-Term IDR could be revised to Stable if pandemic-related disruptions abate and regulatory risks moderate, supporting a more stable business model, particularly if in conjunction with improved earnings and stable leverage.
Upside for the ratings is limited in the short term due to moderate scale (compared with higher-rated peers') and Fitch's unfavourable view on near-term prospects for the
The senior unsecured debt ratings are principally sensitive to a change in Provident's Long-Term IDR and material changes to Fitch's recovery expectations for the bonds.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Provident has an ESG Relevance Score of '4' each for Exposure to Social Impacts: and Customer Welfare - Fair Messaging, Privacy & Data Security. This is driven by its exposure to shifts of consumer or social preferences or to regulatory measures. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.
On other ESG credit relevance scores the highest level is a '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
Provident Financial Plc LT IDR BB Downgrade BB+
senior unsecured
LT BB Downgrade BB+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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