- The Washington Times - Friday, January 4, 2002

Troubled credit-card company Providian Financial Corp. said yesterday it will cut 800 jobs as it copes with more of its customers failing to pay off their debt.
The San Francisco issuer, which targets consumers with low income and short credit histories, said it was making the 6 percent reduction in its work force to become more efficient.
The move is the latest headache for the issuer, which has had trouble for the past year and a half:
Its shares fell 95 percent last year to $3; The stock fell 11 cents yesterday to $3.44 on the New York Stock Exchange.
Third-quarter earnings dropped 71 percent from a year earlier, causing the resignation of the company's chief executive.
Providian made an accounting change without notifying investors, prompting numerous class-action lawsuits.
Rising losses led federal regulators to restrict Providian's growth and prohibit the issuer from lending to consumers with poor credit histories.
"With the economy turning downward, we've seen the industry split into two groups companies that are able to maintain growth and credit quality, like MBNA or Capital One, and others like Providian, who have run into trouble," said David Ritter, a financial analyst with Argus Research. "Providian is struggling to get back on track but, certainly, in this kind of environment, it's going to make it difficult."
The most immediate reason for Providian's trouble is the recession, which has hit the creditor harder than others because riskier borrowers owe about 30 percent some $9.4 billion of its outstanding loans.
"They shifted [in late 2000] even more towards subprime borrowers and that shifted toward the lower end of the customers," said Reilly Tierney, a financial analyst with Kelton Fox-Pitt.
"That customer [over 2001] really deteriorated … generating losses much higher than Providian had expected."
The unemployment rate rose to 5.7 percent in November, according to the Bureau of Labor Statistics, and is expected to have climbed for December.
Meanwhile, bankruptcy filings for the fiscal year ended Sept. 30 rose 14 percent to a record 1.44 million from 1.26 million a year earlier.
Credit-card delinquencies in the third quarter ended Sept. 30 to 3.77 percent of credit-card accounts overdue, up from 3.21 percent during the same period in 2000.
"When people aren't employed, credit-card bills tend to be the first that don't get paid," Mr. Ritter said. "It's not like a mortgage, where you can repossess the home and sell it credit cards are completely unsecured."
With yesterday's job cuts, the company will have shrunk its work force 11 percent since announcing its new strategic plan in October. The cuts will save about $60 million a year.
Providian also is tightening eligibility for new loans and credit-line increases, and is planning to sell $3 billion of its riskiest outstanding loans, said company spokesman Alan Elias.
Other savings will stem from the sale of Providian's British and Argentine businesses, which together comprise $585 million in receivables.
Providian's clientele is split into equal 30 percent high-end and low-end customers, and 40 percent middle-end clients. The company is pinning its hopes on the largest group, Mr. Elias said.
But analysts say it is time for Providian to strengthen its existing assets, not expand.
The company's growth is limited by the Federal Deposit Insurance Corp., which guarantees deposits up to $100,000, and the Office of the Comptroller of the Currency.
The regulators told the company a month ago that it is prohibited from issuing any credit cards to any consumers with poor credit histories.
The regulators also limited the company's asset growth to 2.5 percent during the quarter, and ordered the company to submit plans for maintaining adequate capital to cushion against loan losses.
Last summer Providian took another blow when the company changed accounting practices. Numerous lawsuits were filed, charging that the company did not tell investors that it had switched from immediately writing off receivables upon knowing that customers had filed for bankruptcy to accumulating bankruptcy notifications and writing them off once a month.
By doing this in late June, Providian was able to defer some $30 million in charge-offs from the second to the third quarter, inflating the company's second-quarter earnings by 6 cents per share, the suits charge.
"They lost a lot of credibility with the market over that," said Mr. Tierney, who rates the stock a hold.
In the fall, third-quarter earnings slipped a dramatic 71 percent, prompting the resignation of the chief executive, Shailesh Mehta, who had run Providian since it became a publicly traded company in 1997.
The company hired as its CEO Joseph Saunders of FleetBoston Financial Corp., a move analysts hope will get Providian back on its feet.
Mr. Saunders has a history of dealing with companies in turmoil.
Other problems at Providian stem from a settlement the company reached with regulators some 16 months ago, when the company agreed to discontinue its debt-consolidation program.
Regulators said Providian was marketing the program with promises of high savings, but that it was not actually saving consumers much.
The issuer was fined $300 million and it stopped the program, which soon was discovered to have accounted for the bulk of its high-end business.

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