Provident Financial PLC’s (LON:PFG) balance sheet strength will help the sub-prime lender to weather the coronavirus recession and emerge into a larger market with fewer competitors, analysts at Jefferies reckon.

The group said this week that its businesses have adapted well to the coronavirus crisis and its capital position has remained strong, with £190mln of headroom on its CET1 capital ratio and £1.2bn of liquid resources available.

Although the Jefferies analysts forecast an adjusted loss before tax of £55mln this year, they we expect CET1 to remain over 30% and for profitability to return in 2021 as the economy recovers.

With some of the competition, such as BrightHouse, Amigo and the swathe of payday lenders, having exited the market or experiencing difficulty, while the Provvy has maintained a strong balance sheet, the analysts think it will come out of the recession strongly, with funding flexibility to take market share.

Its diversified funding base includes access to the deep and liquid retail deposit market, as well as wholesale funding lines, the number crunchers said, with PFG also paying back its loan facility with M&G in January and has no further debt maturities until the second half of 2021. 

“The recession is likely to push more people into PFG’s target market,” the analysts added, noting that a recession stemming from the COVID-19 pandemic may result in a reduction in disposable income for those people on lower-middle incomes.

However, receivables are going to remain under pressure this year and next, with the effects of lower new lending and increases in arrears and ‘stage 2’ and ‘stage 3’ credit risk assets under, with total receivables forecast to fall 12% this year “and not returning to 2019 levels until 2022”.

With a loss for 2020 expected to bounce back to profit in 2021, Jefferies slashed its share price target for PFG from 470p to 250p, which is still roughly equal to tangible net asset value per share, leading to the analysts upgrading their recommendation to ‘buy from ‘hold’.