Starting a bank isn’t cheap … just ask Discovery

Discovery’s big bank bet has to work. By the time it launched publicly in 2019, the group had invested more than R6 billion in getting to that point – on regulatory capital, build capex as well as a total of R3.28 billion it paid to FirstRand to exit its banking and card joint venture.

Then, add the cumulative R4 billion-plus in operating losses since 2018. In the year to June 2022, the bank reported an operating loss of R990 billion … the third billion-rand loss in a row.

Read: Discovery slides over 10% on decision not to pay ordinary dividends

This has been a costly exercise, but it is laser focused on driving the bank to scale – it is what the group terms one of three “large scale initiatives” (the others are its Amplify Health JV with AIA in Asia and the Vitality One platform).

Shareholders are not going to tolerate start-up losses in these new initiatives forever and Discovery has committed to getting its investment spend on these back down to its long-term guidance of operating profit.

This year it ‘spent’ almost 20% of core operating profit on these. In other words, were it not for these new businesses, operating profit would’ve been R11.5 billion – not the R9.4 billion reported.

Thus far, growth has been solid. Client numbers are up to 470 000, an increase of 42% on the figure as at the end of June 2021, with a 58% increase in the number of accounts to just more than one million. This means it is increasingly successful in ensuring that new and existing account holders open a second or third account (such as a credit card, or forex or savings one).

Discovery gives Vitality members two big reasons to open an account
Discovery Bank records new milestone with 1m accounts

It is opening more than 800 new-to-bank accounts a day, versus 500 a year ago. Its medium-term target is 1 000 sales a day, which would take it to one million clients by 2026. Around three-quarters of its clients are ‘active’, with a third of the total base primary clients (who receive salaries or regular deposits) or ‘highly active’ (with spend of more than 15% of their income via the bank).

New to Discovery

In line with its market share in medical aid schemes (40% of the total market, including the Government Employees Medical Scheme), nearly six in every 10 Discovery Bank clients are new to Discovery.

Its share of new credit granted is now 7.4%, more than double the 3.5% level it was last year. Discovery is deliberately lending to less risky customers, with 51% of its new credit business either medium, low or exceptionally low risk. By contrast, this figure for the broader market is 31%. Its credit loss ratio is, understandably, less than half the market (2.2%, including overlays, versus 5.1%).

Discovery Bank holds 23% – or nearly a quarter – of new credit card market share of those earning more than R100 000 a month.

It holds the largest market share in this segment. It is also no laggard in the R50 000 to R100 000 market, with 14% of this – around equal to three of its larger rivals.

Advances total R4.5 billion, and retail deposits are at R11.2 billion. In both of these, it offers dynamic interest rates dependent on the account holder’s Vitality Money status.

Fight for customers 

Its history – where banking efforts were housed in a joint venture with its former parent FirstRand – means that many of the customers it is fighting over are from the same pool. Both banks have aggressively tried to win, or win back account holders of the original DiscoveryCard, after Discovery bought that base in 2017 to get its bank off the ground.

FNB is running a limited promotion with Takealot where its eBucks rewards customers earn 15% back in eBucks on deals running on the 15th of each month. Discovery launched this in July last year, where customers can double their discount at partners to up to 40%, also on the 15th. It is obviously no coincidence that FNB chose the 15th too.

FNB has been slowly moving into short-term and life insurance, after parent FirstRand’s rather slow-and-steady entry into investments with Ashburton in 2015.

One could see a scenario where FirstRand enters the health insurance market … perhaps not with a full medical scheme.

Discovery Bank reported gross non-interest revenue of R853 million for the past year, with net-interest income of R318 million.

Its base case of reaching break-even in FY2025 remains, but it has shared a stretch goal of reaching daily sales of 1 200 new-to-bank customers by FY2024, which will see it reaching profitability about six months earlier.

More advances, a better credit loss ratio or upward shifts in non-interest revenue will see the bank follow an “upside” scenario.

Listen to Moneyweb editor Ryk van Niekerk speaking to Discovery group CEO Adrian Gore on its latest financial performance (or read the transcript here): 

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