October 19, 2001
Credit-card giant Providian's stock price lost half its already-diluted value as its chairman resigned and admitted the company's business model is a dud. The company said it will reduce credit lines and raise interest rates for many of its customers.
For years, Providian has fueled a high growth rate by pursuing what's called the "subprime" market, meaning consumers with a poor credit history. But the high fees and soaring interest rates were overshadowed by an equally high rate of credit losses.
With the economy in a slump, the firm's credit losses continued to climb and Wall Street lost patience with chairman Shailesh Mehta, whose resignation was announced today.
At a conference call with financial analysts, Providian vice chairman David Petrini said the company will suspend lending in five of nine segments in the sub-prime market and dramatically reduce credit line increases and reprice some lending lines to account for increased risk.
Petrini also hinted at layoffs as he said the company will "rationalize our cost structure."
Providian said it will concentrate on higher-income consumers but analysts noted that market is highly competitive. A more likely possibility is that the company will be taken over, analysts said.
