Why I'd buy FTSE 100 turnaround stock Provident Financial plc ahead of Barclays plc

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Provident Financial PFG

So much for the Trump bump. While shares of global investment banking rivals such as Goldman Sachs, Bank of America and JP Morgan have risen at least 40% over the past year, the Barclays(LSE: BARC) share price actually sits 3% lower than it was before the election of Donald Trump.  

This overwhelming underperformance is hardly a surprise when you dig into Barclays' Q3 results to September. Group revenue for the period fell 2% year-on-year (y/y), its cost-to-income ratio remained stubbornly high at 65%, and group return on average equity, while improved, only rose to a miserly 5.1%.

On the plus side, poor returns at the group level can be blamed less and less often these days on the bank's bevy of bad assets left over from the financial crisis, as they've now shrunk enough that their results have been folded back into the group as a whole.    

On the negative side, poor returns in Q3 can be laid squarely at the feet of the group's gigantic investment bank. Pre-tax profits for this division fell by a whopping 33% y/y as low volatility impacted trading revenue and the bank came up against a strong comparative quarter.

But the continued struggles of the investment banking arm are more than a mere short-term worry as CEO Jes Staley has pinned his reputation on growing it while selling off profitable African retail banking operations as non-core.

Furthermore, the investment bank's RoE almost halving to 5.4% only serves to underline how impressive Barclays' UK arm is with its RoE for the period a whopping 18.4%.

I can't be alone in thinking that the share price wouldn't be in the doldrums if investors could invest in the retail bank and shed the costly and underperforming investment arm.

A turnaround with teeth 

If I were to invest in a financial stock today, I'd be much more likely to take a punt on subprime lender Provident Financial(LSE: PFG). The company's shares have shed nearly 70% of their value over the past year due to a pair of profit warnings issued this summer on poor trading in the company's core doorstep lending business.

But underneath these profit warnings there are signs that everything may not be as bad as it seems. To start with, the poor trading performance isn't due to a downturn in repayment numbers from its customers but rather a botched business model change when its former CEO attempted to bring its formerly self-employed door-to-door lending agents in-house.

It turned out they liked their independence and disliked Provident's meddling and reassigning territories. So they left. Which meant no one to collect loans due and extend new ones. Oops.

But Provident is fighting back and is starting to see results as collection performance improved from 57% in August to 65% in September and sales performance improved by more than a third.

Furthermore, the rest of the business continued to perform well. The company's most profitable division, its Vanquis credit card arm is set to beat last year when it posted a full £204.5m in pre-tax profits.

While I won't be buying shares of Provident Financial until the state of its consumer credit division is clearer, I see much more capital appreciation prospects from this turnaround story than I do in Barclays.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.


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