Why Provident Financial plc isn't the only banking stock I'd buy for my ISA

The 5 April ISA deadline is now just three weeks away. If you're keen to use some of this year's allowance to increase your exposure to the banking sector, I think it might be worth looking beyond the usual high street names.

One stock I'd consider

Doorstep lender Provident Financial (LSE: PFG), was founded 138 years ago. The company made headlines for all the wrong reasons last year when its share price collapsed following a botched attempt to switch from self-employed loan agents to an in-house workforce.

Several profit warnings followed. The firm has also agreed a £172m settlement with the FCA relating to sales of a credit card payment protection plan. All of this has left the group slightly short of cash, so when Provident released its 2017 results in February, the firm also announced plans for a £300m rights issue.

Despite this surprise fundraising, its 2017 results were largely as expected. Indeed, the figures showed early progress with the group's turnaround. I believe the new management has been open about the problems it faces and is working hard to fix them.

The right time to buy?

Its two largest shareholders are Woodford Investment Management and Invesco. Together, they control 48% of the stock. Both fund managers have indicated their support for the rights issue, so it seems fairly certain to succeed.

The deadline for taking part is the close of business on 19 March. But in my view a simpler approach to investing is to wait for the shares to go 'ex-rights' on 22 March, when the share price will fall sharply.

I expect an 'ex-rights' price of about 675p. By adjusting the current earnings forecasts to allow for the new shares, I estimate that at this level the shares will trade on a 2018 forecast P/E of around 12, falling to a 2019 P/E of around 9.

Although it's not without risk, I believe Provident is likely to be a profitable turnaround buy at current levels, with attractive income potential.

A family-run choice

Family-owned firms often perform well over long periods. Owner-managers have a much stronger incentive to avoid risk and plan for long-term growth than the hired executives who run most big firms.

A good example of this is car loan firm S & U (LSE: SUS). Founded in 1938, this group used to be a doorstep lender, but this business was sold in 2015 and the firm is now a motor finance specialist.

Most borrowers have poor credit histories, so interest charges are high, as are default rates. But this is part of the group's business model and the group's return on equity -- a key measure of profitability -- has stayed level at 15%-16% since 2015.

Sustainable growth?

The group's February trading statement reported "record-breaking" growth, with customer numbers up by 25% to 54,000 over the last year. Chairman and founding family member Anthony Coombs describes this growth as "sustainable" and confirmed plans for continued dividend growth.

Looking ahead to the current year, analysts have pencilled in a payout of 103p per share, which should be covered 1.95 times by forecast earnings of 200.6p per share. These figures give the stock a forecast P/E of 11.6 with a prospective yield of 4.4%. I'd rate the stock as a buy at these levels.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended S & U. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.