How often do shares of a FTSE 100 company fall by 68% in one day? Thankfully, not very often.

But when subprime lender Provident Financial issued a major profit warning on Tuesday, cancelled its dividend and warned investors of a FCA investigation, the shares crashed.

The good news is that investors with balanced, diversified portfolios shouldn’t have suffered too much. A 70% loss on a 5% position will only reduce the total value of your portfolio by 3.5%. That’s disappointing, but hardly the stuff of nightmares.

The bad news is that Provident shares have now fallen by 80% in 2017. It’s probably fair to ask if the group’s turnaround can be achieved without some lasting damage.

Whatever happens, I think it’s worth asking whether we could have seen this crash coming. And as there are no suitable new stocks for the SIF Portfolio this week, I thought I’d use this week’s article to try and answer this question.

What went wrong?

If you haven’t been following the Provident saga, here’s a quick recap of what’s gone wrong at this company.

Back in 2016, the company decided to swap its army of 4,500 self-employed doorstep debt collection agents for 2,500 employed “customer experience managers”. The switch was meant to take place in July this year, but it’s now clear that this project has been a costly fiasco.

Firstly, many of the firm’s self-employed agents walked off the job before the July deadline. This meant that loan payments weren’t being collected on time. In June, management said the impact of this would be £40m and warned that new lending was £37m below prior year figures, due to a drop in sales penetration. Guidance for pre-exceptional profit from home credit was cut from c.£110m to £60m.

Since rolling out the new system in July, it seems Provident has suffered serious teething problems. Collection of loan payments is currently running at 57%, compared to 90% for the same period last year. Sales of new loans are £9m per week lower than in 2016.

Full year guidance for the home credit business has now been cut from a pre-exceptional profit of £60m on 20 June to a pre-exceptional loss of £80m-£120m.

RIP ROP?

There’s also one final sting in the tail. It turns out that back in April 2016, Provident’s Vanquis Bank credit card…

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