Argus Research (An independent Research Co.)-PVN---
2-12-02
PROVIDIAN FINANCIAL CORP. (NYSE: PVN)............................................................................... SELL
n SELL-rated Providian Financial recently reported its fourth quarter results and also unveiled its new capital plan
(just approved by regulators), as well as a still-sketchy plan to turn results around.
The company still lacks a clear strategy to resume growth. Providian plans to migrate toward the middle market,
which is easily the most competitive in the industry, but has not articulated a clear marketing strategy yet.
n PVN was able to secure nearly $3 billion in new funds in 4Q, these securitization transactions carry much more
onerous terms than normal, including payouts triggered by ratings agency downgrades.
n We expect credit losses to continue to surge this year as PVN has sold off its best loans ($8 billion-plus to JPM)
and has yet to find a buyer for its worst ($3 billion-plus).
n We reiterate our SELL rating.
ANALYSIS
SELL-rated Providian Financial Corp. (NYSE: PVN) recently reported its fourth-quarter results and also unveiled its
new
capital plan (just approved by regulators), as well as a still-sketchy plan to turn results around.
The results this quarter were as unpleasant as expected, but there were no big surprises. The company reported a net
loss
from continuing operations of $1.39 per share compared with earnings of $0.80 per share in the fourth quarter of last
year. For the
year, PVN earned $0.33, compared with $2.73 the year before.
PVN took more than $1 billion in charges this quarter to boost loan loss reserves ($254 million), write down its
Argentina
business ($134 million), boost reserves for uncollectible fees and charges ($303 million), and account for securitization
transactions that now carry tougher terms ($298 million).
At this point, the company still lacks a clear strategy to resume growth. Providian plans to migrate toward the middle
market, which is easily the most competitive in the industry, but has not articulated a clear marketing strategy yet.
Management
promised to flesh out the details soon at a presentation for the investment community.
We expect credit losses to continue to surge this year as PVN has sold off its best loans ($8 billion-plus to JPM) and
has
yet to find a buyer for its worst ($3 billion-plus). General weakness in the labor market should only exacerbate the
credit quality
problem. PVN has also yet to finalize sales of its U.K. and Argentine operations, although a deal on the U.K. appears
near. While
PVN appears to have stemmed its liquidity crunch, recent securitization transactions carry much more onerous terms,
including
payouts triggered by ratings agency downgrades.
As such, PVN remains a highly speculative investment at this stage. The company’s forecast for profitability in 2002
appears premature in our view. We reiterate our SELL rating.
The remainder of this note goes into more detail with respect to PVN’s results and outlook.
Credit losses were 12.7% of managed loans in 4Q, up from 10.3% in 3Q. However, remove the high-quality loans just
sold to JPM and the loss rate balloons to 14.3% of managed loans. While the reserve was boosted to 16.7% of owned
loans, up
from 12% last quarter, in light of its shifting loan mix and the weak economy, it is still not clear that the current
reserve will be
adequate. We expect charge-offs to continue to trend higher during 2002, perhaps requiring even more reserve
building. The
delinquency numbers this quarter support our forecast. Delinquencies were 9.5% of loans this quarter compared with
8.71% last
quarter.
In terms of liquidity, the company was able to secure $2.8 billion from securitizations during the quarter. But the deal
terms were much more onerous than prior transactions. First, PVN was required to keep more loans on its balance
sheet, resulting
in a larger discount than normal and a one-time charge. Second, the transactions contain more stringent early
amortization triggers
than prior deals, including triggers related to the firm’s credit ratings. The sale of the $8 billion Providian Master Trust
to Chase
also contributed about $2.7 billion to PVN’s liquidity. As a result, PVN now has about $6 billion in liquid assets and
$2.2 billion
in equity. Still, the low hanging fruit seems to have been picked at this point. Going forward, PVN’s capital base will
need to get
boosted by earnings, which seem unlikely to materialize anytime soon.
PVN received approval from regulators to implement its capital plan. The plan calls for PVN to meet well-capitalized
status as of the end of March. More specifically, the firm committed by the end of the quarter to achieve a risk-based
capital ratio
of 8% or better and a ratio of at least 10% by mid-year 2003. However, the regulators assign a much higher risk
weighting to PVN’s
risky assets. Thus, while PVN is already close to meeting these capital requirements (due in large part to the Chase
sale), they will
likely fall below the required threshold in future quarters, and will need to generate capital from operations in order to
meet its
regulatory hurdles. The new capital plan will also restrict PVN’s loan growth over the near term.
The SELL-rated PVN shares closed Tuesday at $4.40, up 0.09. (David Ritter) |
