Providian pays price for growth at wrong time

SAN FRANCISCO -- Providian Financial Corp. seemed to outsmart the rest of the credit card industry in the 1990s. Using the power of computer analysis, Providian figured out a way to reap huge profits by lending money to millions of consumers lacking the income or credit rating to attract other bankers.

The formula worked wonders, transforming Providian from a little-noticed subsidiary of a Kentucky insurance company to a San Francisco-based financial services giant that earned $651 million last year and became the nation's fifth largest issuer of Mastercards and Visa cards.

But Providian's fortunes have changed now that the slumping economy is saddling the company with a growing number of deadbeat customers, and a succession of consumer complaints prompted it to curtail late fees and other lucrative sources of revenue.

"They were stepping on the accelerator at the worst possible time," said industry analyst Michael Vinciquerra of Raymond James & Associates.

With its $32 billion loan portfolio crumbling and its reputation on Wall Street in tatters, Providian is trying to pull itself from financial quicksand of its own making. CEO Shailesh Mehta, the mathematical wizard behind Providian's vaunted computer models, is stepping aside as soon as a replacement is found. The company hopes to hire a new CEO before the new year.

In the meantime, Providian is curbing its lending to high-risk consumers as part of a major reorganization. The company remains confident it will be able to rebound from its recent mistakes, said Konrad Alt, its chief public policy officer. Alt declined any further comment about the challenges facing the company.

Writing off losses

As part of its recovery efforts, Providian has hired investment bankers Salomon Smith Barney and Goldman, Sachs & Co. to explore a "broad array" of alternatives, including a possible sale of the company.

But the depths of Providian's financial woes will likely discourage bidders, analyst John McDonald of UBS Warburg said in an investment advisory this month.

As of Sept. 30, Providian's loan losses had climbed to 10.33 percent of its portfolio, up from 7.71 percent at the end of 2000. Providian's newly delinquent loans also were rising rapidly, a trend that management warned is likely to continue next year.

Although Providian appears to have adequate financial strength to continue operating for at least two more quarters, McDonald believes there is a real risk that federal regulators will slap tough restrictions on the company before its condition weakens much further.

The stock market already has punished Providian. In October 2000, its stock peaked at a split-adjusted $66.72, giving Providian a market value of $19 billion. The shares fell to a low of $2 on the New York Stock Exchange earlier this month, an $18.4 billion reversal of fortune.