Providian Told to Rein in Growth

Regulators have ordered Providian Financial Corp. to rein in its growth and beef up reserves against losses in a move aimed at keeping the struggling credit card company from failing.

San Francisco-based Providian, which built its business targeting borrowers with poor credit, also said Wednesday that it will sell its overseas credit card business, with $188 million in deposits and $585 million in loans in the United Kingdom and Argentina.

The sale comes a month after Providian said it would abandon issuing any more high-interest credit cards to so-called subprime borrowers, or those with poor credit histories. Providian said Wednesday that it formally agreed with bank regulators to abandon that line of business.

Providian had become the nation’s fifth-largest credit card issuer, but with losses mounting as recession set in, the company said that 20% of its subprime accounts could suffer losses. About a third of Providian’s $32 billion in credit card loans had been with subprime borrowers.

Although few credit card issuers have had the magnitude of losses as Providian, federal regulators have been moving more quickly against banks that are heading for trouble after the high-profile collapses of Superior Bank, an Illinois thrift that got in trouble with subprime loans, and the First National Bank of Keystone, W.Va., which was riddled with fraud.

Providian’s stock has tumbled 95% since hitting $66.72 in August 2000. Its shares closed Wednesday at $3.12, down 44 cents, on the New York Stock Exchange. With its debt ratings at junk-bond levels, its founding chief executive, Shailesh Mehta, stepped down as chairman last month.

This week Providian hired a new CEO, Joseph Saunders, who learned about subprime lending as a Household International Inc. executive and who previously engineered a turnaround in the credit card business of FleetBoston Financial Corp. Saunders’ challenge will be to cut costs while concentrating on borrowers with higher credit ratings.

Analysts said regulators stepped in because they clearly feared Providian might fail.

“The question is: Can you shrink Providian to a size that is profitable on a going-forward basis--or alternatively to where it becomes an attractive acquisition proposition?” said Bert Ely, a banking analyst in Alexandria, Va.

Saunders, 56, was unavailable for comment Wednesday. Providian spokesman Alan Elias said the new boss had made it clear his goal is to strengthen Providian as an independent company, not prepare it for sale.

Saunders “said he wants to retire with this company,” Elias said.

The agreement with regulators requires Providian to stop paying dividends to shareholders, which had totaled about $9 million a quarter, until regulators permit that to resume.

The company must limit credit increases to its existing subprime borrowers and tighten credit standards on high-risk accounts. And until a new capital plan is approved by regulators, its total assets can grow no more than 2.5% a quarter.

Despite its recent woes, Providian meets regulatory standards for capital and reserves against loan losses. But its agreement with regulators clearly reflects expectations that problems will worsen, so the company has agreed to set higher capital and reserve standards.

By the end of this week, Providian must have a plan showing new sources of capital, with a commitment by the parent company to replenish the banks’ cash as needed. Providian has $16 billion in deposits at its banks in New Hampshire and Utah, which the company uses as a cheap source of funds.

Under the agreement, reserves also must be enough to cover a years’ worth of expected losses, taking into account the worsening economy and other factors.

The company said it was too early to say how much extra it would have to set aside to comply with the order by the federal Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

Ely said Saunders will have to move fast to downsize Providian, a task that will be made easier by no longer needing the large marketing forces that promoted the company’s subprime business. Closing businesses also will create substantial tax breaks, helping the company, Ely added.

“Saunders has probably got as good a chance as anyone at turning this around, given his background,” Ely said.