With its operational break-even point in sight in its 2024 financial year, loss-making Discovery Bank is planning on scaling the business and being profitable in the outer years.
The fledgling bank, which is registering about a 1,000 customers a day, narrowed its loss to R767m in the year to end-June.
The lender is expanding its credit offering and will launch a home loan product in the next few months, according to its results presentation.
The bank, which was launched in 2019, reported a 49% rise in customers, taking its client base to more than 700,000 and closer to its target of 1-million by 2026. Retail deposits rose 36% to R14.3bn and advances leapt 22% to R5.2bn.
Discovery CEO Adrian Gore said the foundation had been laid to turn the bank profitable.
“We want to get return on capital invested. If you look at our hurdle rates of risk-free +10%, we got to earn a 15% running yield on the capital invested. That requires probably a billion to a billion-and-half of profitability to justify that investment,” Gore said.
“That takes years, we understand that. I think that if you’re looking at quality earnings, I think that’s what you need to achieve. A great business isn’t just about profitability. What is happening with the bank is that it is having a tremendous impact on clients.”
The group operates in more than 40 countries. Over the years, it has expanded into insurance and financial services, including the launch of Discovery Bank.
As for the group as a whole, it resumed rewarding shareholders, with a payout of 110c per share as it reported growth in its profit.
Headline earnings per share (Heps), a common profit measure in SA that excludes certain items, improved 5.3% to 834.3c. On a normalised basis, which strips out the effects of interest rate and other movements, it was up 31.8% to 1,166.7.
Normalised profit grew 24.3% to R11.7bn, but the fiscal profit was down 2.9% to R5.3bn.
The Reserve Bank and most central banks where Discovery operates lowered interest rates during Covid-19 to get people to spend money when consumer confidence was down and the world economy came to a virtual standstill.
Since then, interest rates have been hiked to tame high inflation triggered in part by supply-chain issues and the war in Ukraine.
“The period saw prolonged inflationary pressures, rising interest rates, a remarkably strong dollar, increasing consumer pressure and a cost-of-living crisis in many regions. These pressures have constrained economic growth, following short-lived economic rebounds experienced by many countries after the Covid-19 pandemic, with severe energy shortages in SA posing a challenge,” Discovery said.
Discovery Health reported a 19% increase to R8.6bn in new business and a 7% rise to R3.8bn in operating profit.
According to the results under review, Discovery Health medical scheme now has a 57.8% market share in the industry. The company said fewer members were changing their plans, with 97% not having altered their plans in the period.
Discovery Life’s operating profit surged 19% to R4.8bn, buoyed by a double-digit increase in new business, while Discovery Invest grew assets under administration by 15% to R140bn.
Shaun Murison, senior market analyst at IG, said Discovery managed to deliver robust growth in its three main business operations — SA, the UK and the Vitality Global division.
“This is a significant achievement considering the prevailing economic conditions, including inflationary pressures, rising interest rates and a strong US dollar. The headline earnings have also seen a rise of 5%, amounting to R5.4bn, while the normalised headline earnings have surged by 32% to R7.6bn,” Murison said.
“Despite the volatility in headline earnings caused by economic assumption changes, the Discovery Group has managed to maintain its liquidity, cash flows and solvency. The group’s policy of normalising for the impact of long-term interest rate movements has been instrumental in achieving this stability,” he said.
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