Chief Executive's review

In 2009, we were again able to continue to supply our customers with the small sums of credit they need to smooth out the peaks and troughs of their expenditure. However, our home credit business has been affected by a reduction in demand as customers manage down their debt to a level they are comfortable with in the current economic downturn. In addition, we were affected by the adverse weather conditions in December which fell in our key trading weeks before Christmas. So, despite growing home credit customer numbers by a further 5.1% during 2009, we saw the amount of credit we issued remain in line with 2008.

The underlying features which make our business less susceptible to the current turbulent economy and credit constrained conditions still apply going forward. These are:

1. We do not have the type of complex financial products that are difficult, even for those in the industry, to understand; rather, we lend very small amounts to ordinary people.
2. Impairment in our loan book may be higher than those lending in the prime credit market but it is less volatile and so easier to price for the risk it presents.
3. We are not spread throughout the world with all the extra risks that brings. We trade solely in the UK and Ireland – a market we know well, having operated in the UK since 1880.
4. We borrow and lend in the most prudent way – by borrowing long and lending short.
5. We have an effective management team in place throughout the group, capable of intervening to take action in response to events and able to anticipate further changes in the market and the economy.

Our straightforward approach continues to be the right formula for us in these turbulent times. In 2009, we delivered profit before taxation and exceptional costs of £130.1m, up £1.3m on 2008. This rate of growth is lower than we would have expected but the increasingly cautious behaviour exhibited by our home credit customers in the final quarter of 2009 shows that they have been affected by the tough economic conditions we are experiencing. We are confident that the actions taken in 2009 will stand us in good stead as the economy recovers.

The economic environment will change again in 2010 with a General Election in the UK and the start of the process of cutting public spending and repaying the vast sums the Government has injected into the economy to reduce the effects of the recession. These continue to be uncharted and concerning times but I still believe we are as well placed as is possible to ride out the next stage of the economic troubles. We will continue to monitor impairment closely and to price our products competitively to make an appropriate return and so continue to meet the needs of our customers.

I am pleased to report that Provident Financial has made a positive Total Shareholder Return of 16.9% since demerger compared with a fall in the TSR of the FTSE 250 of 15.9%. This demonstrates the strength of the business in these turbulent times.

Our strategy

We aim to be the leading non-standard lender in the UK and Ireland, meeting the demand for credit from our customers. We will achieve this by generating good returns to reward shareholders and to fund our planned growth. We still believe the best returns will come from organic growth of our existing businesses which is where we will continue to apply our focus.

Our strategy to achieve growth is to expand and modernise our home credit business, to scale up our credit card business to achieve significant profitability, and to develop new products in the non-standard credit market to extend our reach.

We will maintain the prudent approach to the financial management and funding of the business which has served us well.

Progress in 2009

We continued to make good progress against our strategy in 2009.

We increased the number of customers served by our home credit business by 5.1% in 2009 and when demand for credit returns to more normal levels this will allow us to further increase the amount of credit we issue.

At the beginning of 2010, following a review of the market test for Real Personal Finance, a direct repayment loan product, we decided to restrict our direct repayment loans to customers with whom we already have a good relationship and to market the loans under the Provident Direct and Greenwood Direct brands.

We made yet further progress in bringing Vanquis Bank firmly into profit and up to operational scale and customer numbers and receivables stood at 426,000 and £255.5m respectively at the end of 2009. We are making good progress towards our new, medium-term targets for this business of growing receivables to £450m by the end of 2012 whilst maintaining a post-tax return on equity of 30%.

These are significant achievements in the current economic climate and, when combined with prudent financial management and our commitment to corporate responsibility, the group is in a strong position entering 2010. A more detailed report on our progress against our strategy can be found in the reports on the individual businesses.

In conclusion, our objective is to be the UK and Ireland’s leading lender in the 10 million-strong non-standard credit market. This means having strong market positions in each of our businesses, operating in a sustainable fashion, being a highly regarded corporate citizen, and maintaining high customer satisfaction ratings. We are well placed to achieve those ambitions.

Peter Crook
Chief Executive
2 March 2010