Discovery set to exceed banking target
‘One of the stars of the show’ to hit 1-million clients by 2026
● Financial services provider Discovery Group says it is on track to exceed its target of 1-million banking clients by 2026 as its South African banking business breaks even operationally ahead of expectations.
The group’s South Africa-focused Discovery Bank showed progress across all metrics, with its client base accelerating and the bank reaching monthly operational break-even before acquisition costs during the period, it said in its interim results for the six months to December.
“The bank continues to grow strongly and I think it’s one of the stars of the show,” group CEO Adrian Gore said, adding that the bank was growing quicker than expected.
Discovery Bank delivered a strong new business performance, averaging more than 1,000 sales per business day, and is managing to bring in clients who do not use any of the group’s other services. More than 50% of new clients aren’t Discovery clients at all, Gore said.
The bank’s client base jumped 42% over the period, and now exceeds 825,000 with almost 2-million accounts, setting it up to exceed its target of 1-million clients by 2026.
“I think we’re pretty confident we can sustain that. It’s moving faster than we thought and on all the metrics it’s doing better than we thought,” Gore told Business Times, though he didn’t give an estimate of the amount by which the firm could exceed the target.
The bank’s operating loss before new business acquisition costs improved 40% to R154m from R256m a year earlier, while the overall loss was 15% better over the same period.
“Obviously the bank must make profitability quickly, and we believe we will do that in this financial year,” he added.
At group level, which includes operations in South Africa, the UK and China, headline earnings were little changed, while normalised headline earnings grew 11%.
“The difference is explained by the considerable prior period fair value gain from the UK interest rate swap option... [which] was realised towards the end of the prior financial year, with no profit impact in the current period,” the company said.
The Discovery Bank model is built on non-interest revenue (NIR); that is, net banking fees and commission income. The company said NIR growth, which has grown by a compound 38% over the past number of periods, was driven by banking capabilities.
“We strongly believe we’re building a full-service bank that people are using,” Gore said.
The digital bank has seen record-high monthly activity as clients start to use the offering more and new clients come on board.
The company aims to make the offering “bigger than just a full services bank” by providing a platform where the Discovery composite is available, Gore said.
The offering, in which the Vitality Travel incentive is a key feature, is looking to bring on board other ecosystems such as Vitality Fitness. That would allow clients to discover, select and pay for workout classes through the bank.
“This idea of ecosystems that Discovery works in is very important. It makes the bank, we think, very valuable to our customers ... [it] drives up the usage and of course the NIR,” Gore said.
He said the group now has several businesses that are either profitable or nearing profit, such as its digital bank. These businesses have almost reached cash flow generation and the company isn’t providing “dramatic investment” into other initiatives.
The Discovery group has culled off initiatives that it felt would not provide longterm potential, including Vitality Invest and Vitality Car in the UK.
But the company expects its banking segment to continue providing long-term prospects.
The bank — which started as an unsecured lender through a credit card facility — is planning to offer home loans within the next four weeks.
Discovery said there are about R1.4-trillion worth of home loan balances held by South Africans. It estimates that Discovery Bank’s client base has about R280bn worth of home loan balances and that 60% of these are mispriced, with the potential for clients to get an interest rate reduction. This could “dynamically reduce [their] interest rate by up to 1%”, the company said in the presentation.
Discovery expects further real growth in its banking business over the medium term, with profit before tax expected to grow by 65%-75%.
Other growth opportunities are housed in its Vitality chassis, Vitality Global and Vitality Network offerings. In conjunction with the bank, these platforms could provide for 5%-10% higher annual operating profit growth and boost cash flow growth by 10%-15%, the company said.
Discovery’s other South African operations posted solid performances for the period, with normalised profit from operations rising across its Insure, Invest, Life and Health businesses.
This metric fell in its UK-based Vitality Health business, while in its UK Vitality Life offering almost doubled in rand terms. Profit measures in its Vitality Global offering also jumped.
The company declared an interim dividend of 65 cents a share, after not paying shareholders in the same period last year.