MARKET COMMENT
Please Don't Ask For Credit...

By Cliff D'Arcy
June 27, 2003

One of the least funny signs I've ever seen is on display in countless pubs and shops across the UK:

"Please don't ask for credit, as a smack in the mouth often offends!"

Until the 1970s and the arrival of the 1974 Consumer Credit Act, "credit" was a nasty word and most Brits rarely borrowed from banks, not even to buy a home. People either saved up for major purchases or did without banks and relied on pawnbrokers, loan sharks and store credit instead.

These days, consumer credit is booming, both on the high street and beyond. According to a report released earlier this year, around 7.8 million UK adults are routinely turned down for credit. This has led to strong growth in impaired-credit lending: the realm of the doorstep moneylender.

There are six companies listed in the "Speciality and Other Finance" sector that specialise in sub-prime lending. However, we will omit Kensington (LSE: KGN) and Paragon (LSE: PAG), as most of their custom comes from non-status mortgages and secured loans.

Here are the four remaining companies:

Company                       Market Cap (£m) Price (p) P/E Ratio   Dividend Yield
Provident Financial (LSE: PAG)   1,646          648        11.8          5.0%
Cattles (LSE: CTT)               1,063          325        12.7          3.7%
London Scottish Bank (LSE: LSB)    181          128.5      12.5          4.6%
S&U (LSE: SUS)                      50          420         8.3          6.9%

Home credit and insurance provider Provident released a trading update this morning in which it advised that it had raised revenue, collections and customer numbers. However, bad debt had increased also, lending was down slightly on the previous period, and profits from motor insurance had fallen.

Provident acquired rival Yes Car Credit back in December and, as a result, reported higher sales in its motor finance division. It is also giving thought to entering the sub-prime credit card market and is test-marketing a VISA card via its Vanquis Bank brand. Finally, its international business is booming, with a move into Mexico planned for later this year.

As the market leader (and the only one of the four companies in the blue chip FTSE 100 index), Provident is possibly the pick of the bunch. With an above average yield for a Footsie firm, good debt-management systems and plans to continue its international expansion, its shares have some way to go at 648p.

However, I won't be investing in any of these companies until the consumer credit laws have been revised, as I view their interest charges as extortionate. Although not an ethical investor in the strictest sense of the phrase, I don't want to benefit from exploiting people on low incomes!

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