Ratings agency Moody’s expects Discovery’s profitability to improve on an absolute basis as newer businesses mature and require less ongoing investment.
The agency, in a credit opinion on the R161bn group, said as the company invests less in new initiatives, it expects surplus funds to be used for gradual reduction in debt.
“The group’s most significant sensitivities to both earnings and capitalisation are lapse and mortality and morbidity. The group has demonstrated that through customer engagement with its shared value model its lapse and mortality and morbidity experience are substantially improved compared to peers,” Moody’s said.
“South Africa’s health business carries particularly low risk as it is mainly fee-based and we consider UK health low risk. In Vitality Global, Discovery bears risk either through minority equity stakes or through fee-based licensing of the shared value model.”
One of the initiatives that Discovery has ploughed resources and time into is its banking proposition, Discovery Bank.
As Discovery Bank grows, credit risk will grow as it grows its lending portfolio. At present, the bank is focused on unsecured consumer lending.
— Moody’s
The fledgling lender recorded its first profitable period in the second half of the year to end-June, ahead of schedule.
Launched in 2019, the bank has been reducing its losses since its formation. It reported an operating loss of R1.2bn in 2020, R1bn in 2021 and R990m in 2022.
“As Discovery Bank grows, credit risk will grow as it grows its lending portfolio. At present, the bank is focused on unsecured consumer lending,” Moody’s said.
“Based on its experience to date, with a reported non-performing loan ratio significantly better than the average of South African banks, and its focus on the retail affluent market segment we expect banking risk to remain moderate for the next 12-18 months.”
The banking space in South Africa is getting crowded with new players entering the space. Retail major Pepkor has armed itself with a banking licence, aiming to tap into its 32-million client base.
Old Mutual has also made a re-entry into banking with the launch of OM Bank.
Moody’s said the recently passed National Health Insurance Act has the potential to be credit negative for Discovery.
“In its current form it would preclude the group from operating the majority of its South African health business, which generates around one-third of the group’s net income,” it said.
“We consider it unlikely any changes would have an impact over the outlook period, or even the medium term, given the complexity and cost of implementation for the South African government.”
The rating agency considers Discovery’s control and diversity of distribution to be credit strengths.
“Health business is more intermediated, although a meaningful portion is sourced from the direct channel. Discovery’s tied agent and adviser network is significantly smaller than that of large peers, but is highly productive and focused on the retail-affluent market, which results in a smaller number of higher value policies being sold.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.