Just what is Discovery banking on?
New lender will need an ‘edge’ as it embarks on its latest challenge
They don’t have enough capital to truly be a big player Wayne McCurrie
FNB Wealth and Investments
● Adrian Gore’s Discovery has enjoyed rapid growth since its inception some 26 years ago, broadening its product offering beyond medical aid into insurance and financial products and, this year, banking.
The company’s diversification away from its core healthcare product is drawing more intense investor interest as the long-term prospects for that business are muddied by the impending National Health Insurance.
So pervasive has Discovery Health’s growth been that the recently completed Health Market Inquiry, which looked into competition in the private healthcare market, described it as “an indication of market failure” and that the market showed no signs of self-correcting.
The company, founded by Gore and a colleague in 1992 after leaving Liberty Holdings, is made up of a medical aid arm, life insurance, a Vitality health programme and some other financial products.
Its insurance arm has already overtaken its healthcare business, and, according to Bloomberg data, makes up more than 50% of the company’s revenue.
As part of its ever-evolving and diversifying business, the firm is set to launch Discovery Bank this year.
The bank will face stiff competition from existing banks as well as the soon-to-belaunched TymeDigital bank, owned by the Commonwealth Bank of Australia, and former FNB CEO Michael Jordaan’s Bank Zero.
Wayne McCurrie from FNB Wealth and Investments said the government had been trying for years to limit medical expense growth and Discovery’s diversification strategy and its foray into banking could be a response to this threat.
“This effort by the government to reduce [medical expense growth] is why Discovery has branched out from medical aids, because they saw that margins were shrinking under health,” he said.
However, McCurrie said, healthcare companies were unlikely to feel the impact of the NHI for about a decade.
Discovery will launch its new bank as South Africa pushes forward with the NHI, which is set to change the way South Africa’s private and public healthcare sectors operate. The NHI is part of the government’s goal to provide good quality, affordable universal healthcare for South Africans.
McCurrie said Discovery had a loyal customer base in South Africa, to which it is now cross-selling its other products, from credit cards to mortgage bonds and insurance. However, banking might be a tough nut for Discovery to crack.
“The problem with Discovery is that they don’t have enough capital to truly be a big player in the banking market,” he said.
He said the bank might start quite small — and to truly become big, Discovery will need to raise capital by selling shares.
Markets haven’t been so fond of insurance stocks in general recently, but Discovery has been hardest hit this year to date. The jury is certainly out on just how its banking operation will be received. From their March peak this year, the firm’s shares have dropped more than 20% and are 14.91% lower for the year.
The deputy chairman of Sasfin, David Shapiro, said: “I don’t know how they are going to manage [the bank].”
He said Discovery was quite innovative and had made an impact with Vitality, and its health business customer base was an advantage, but it was unclear how Discovery would fare in its bid to break into the banking sector.
“We are all trying to work out where their edge is going to come from. What the catch point will be, I don’t know,” he said.
Shapiro said the Reserve Bank’s GDP growth outlook of 1.2% for 2018 was concerning for any company trying to break into banking.
“We are not generating money [which means] we are not going to generate money for credit in that environment,” he said.
With regards to the NHI, Shapiro said it was a reflection of a global issue, with governments all over the world bent on introducing stricter controls for healthcare companies.
Discovery did not appear worried about the impending NHI, with the CEO of Discovery Health, Dr Jonathan Broomberg, saying the reason Discovery was developing the bank lay more in its innovation-centred approach to business.
“Discovery is building a bank because it believes it has a disruptive proposition to bring to market and a firm belief in the future of South Africa,” Broomberg said.
He said Discovery believed the NHI system would emerge incrementally and medical schemes would continue to operate alongside it.