FirstRand snag a nasty Discovery in bank bid

Discovery appears to have hit a roadblock with competition authorities over the launch of its bank, which could result in the unusual situation of FirstRand continuing to hold a 25% share in the bank’s credit card business after its launch.

Ever since it first unveiled plans to launch a retail bank in September 2015, Discovery has made it clear that the bank would incorporate its FirstRand-issued credit card. Discovery Bank will probably start by trying to convert its 325,000-odd cardholders into full bank customers. It has rich data on the spending habits of this client base, which exhibits much lower credit losses than the rest of the industry.

In 2015, it used R1.3bn of a R5bn rights offer that year to increase its stake in the DiscoveryCard joint venture to 75%. FirstRand still holds 25% of the economic interest.

Discovery says the proposed purchase of the card book is subject to competition commission approval.

An elusive Adrian Gore said Discovery’s banking licence was issued “subject to certain shareholder issues we’re trying to deal with”. “We’re working through them — we haven’t disclosed them; they are complicated issues. I don’t anticipate that creating a delay.”

As it stands, however, this shareholding structure will be transferred into the bank on the same effective interest ratio, meaning that FirstRand will own a small part of the bank – a snag Discovery probably did not anticipate and that could have awkward implications for the bank’s independence.

Chairman Shams Pather is keen to dispel the notion that Coronation Fund Manager (CFM) is a “white company”. Part of the evidence provided is that 63% of the board of directors are black, 54% of employees are black, four out of six client-focused operational managers are black and 43% of senior portfolio managers in the SA-focused team are black. That is all very commendable but perhaps a better indication of who’s actually in charge might be gleaned from details of the long-term incentive scheme operated by the CFM Trust.

Who gets how much of a pie that runs into several hundred million rands each year would be useful information that may or may not substantiate the board’s transformation claims.

One critical aspect of that scheme, which belies Coronation’s much touted “trust is earned” advertising mantra, is the definition of long term as three years. This is perplexing for a company that says it is committed to making long time horizons work for its client.

“Coronation is an active investment manager following a long-term valuation-driven investment philosophy,” the company says on its website.

There wasn’t much sign of that action at Steinhoff where Coronation voted against only two resolutions at all the shareholders’ meetings held since December 2013.

CEO Anton Pillay contends they are active in their engagement with their investee companies behind closed doors. That explanation is not as persuasive as it once might have been.

Twenty-five years ago an amazing team at Coronation launched a revolution in the fund management industry. In those years it made substantial returns for its clients and investors. It needs to reclaim some of that dynamism if it is to continue thriving. The steep barriers to entry will only protect it for so long.