) hired Joseph W. Saunders as chief executive in November, 2001, many investors didn't think the San Francisco credit-card company would last another year. Once the fifth-largest U.S. card issuer, Providian had begun to unravel that fall. Its strategy of handing out plastic to risky customers backfired when the recession led to big loan losses and the resignation of its chairman and CEO. "The capital structure of the business was abysmal," Saunders says. "We didn't have the financial underpinnings to survive."
Working with regulators and a new management team, Saunders devised a three-year plan to transform Providian into a smaller but sounder organization. Avoiding subprime customers, the company now targets people with at least average credit, and has cut its credit loss rate to 10% of its outstanding loans from a peak of 18% in 2002. That's still high: The average for the industry is just 6%, according to Moody's Investors Service (MCO
). "We're three-quarters of the way across the English Channel, and we know that if we stop swimming, we'll drown," Saunders says.
In its fourth year under Saunders, Providian is looking fit enough to make it all the way. Since the first quarter, Providian's receivables are up 7%, to $18 billion -- the first rise in three years. Richard B. Shane Jr., an analyst at Jeffries & Co. (JEF
), expects the company to earn $361 million this year -- its biggest profit since 2000 -- on revenue of $3.65 billion. What's more, Standard & Poor's (MHP
) recently raised its outlook on Providian's credit from stable to positive. And the stock has risen smartly, from a low of $2.01 three years ago to around $16 now.BETTING ON A SALE
These days, Saunders, a 58-year-old former credit-card chief at FleetBoston Financial Corp. and Household International, often fields a pointed question: Is Providian for sale? He plays down the possibility the company may be acquired, but most analysts say it's a foregone conclusion. "I don't think they're going to be around in six months, let alone a year," says David Robertson, publisher of The Nilson Report, an industry newsletter.
The list of possible buyers is long. Near the top is British bank Barclays PLC, which bought Providian's British business for $500 million in 2002 and, according to analysts, was negotiating to buy the rest of Providian in February. Talks broke down over the undisclosed price, but a deal could yet be done. J.P. Morgan Chase & Co. (JPM
), which bought $2.8 billion in loans from Providian in 2002, is a possible acquirer, as is Citigroup (C
). None of the companies would comment.
A sale would solve a nagging funding problem for Providian. To finance more loans, it issues securities backed by existing loans. But demand for the loans can be fickle. As part of a financial-services powerhouse, Providian would be able to tap capital in both good times and bad. "It's inevitable that independent subprime credit-card companies will become part of diversified organizations," says Thomas K. Brown, chief executive of New York hedge fund Second Curve Capital LLC. He's betting on a sale: As of June 30, his fund owned 4.9 million Providian shares.
But Saunders doesn't act like a man about to sell his company. Instead, he's exploring ways of diversifying the business. One possibility: linking up with other companies to offer mortgages and home-equity loans. And on Oct. 19, Saunders renewed his contract, due to expire at the end of this year, through 2007. As the financial picture brightens, Providian can afford to bide its time. Every quarter of improved results makes it stronger -- and raises its price tag. By Justin Hibbard in San Mateo, Calif.