Discovery needs to keep adding an average of 1 000 new bank accounts daily and consistently in its base case, which sees this unit making between R1 billion and R1.2 billion in operating profit within three years.

This base case sees a monthly level of R100 million operating profit before tax being reached in the 2026 financial year.

It is practically at this threshold of 1 000 daily new business sales in recent months (per business day), which is more than double the number of clients it was adding a year ago. This will see it reach one million clients by the end of FY26.

At R1 billion in operating profit, Discovery Bank will become a meaningful contributor to overall profit – roughly in line with the annual contribution from Discovery Invest.

There are four other levers that will influence it reaching this operating profit level.

It needs to grow the average income it generates per customer per month to above the R200 level. One way of doing this is to increase its average advances per customer which, according to its base case, needs to grow fairly markedly from its current level. The model sees a commensurate increase in its credit loss ratio, which is expected.

Finally, it needs to reduce its current level of expenses growth. If it performs better on most of these metrics, an upside scenario sees an obviously higher operating profit.

The numbers

The group says the bank is making “excellent progress”.

It reported an operating loss of R398 million for the first six months to December 2022 – a 20% improvement on the prior first-half of 2022. Excluding new business acquisition costs, its operating loss is under R300 million.

Total clients are at 581 000, up 51% versus a year ago, with total accounts growing even quicker (66%) at 1.3 million. Retail deposits grew by 33% to R12.7 billion, while advances are up 19% to R4.8 billion. Its credit loss ratio of 1.8% is superior to that of rivals.

Net income was 71% higher at R706 million, as the bank continues to scale. Close on half a billion rand of this was net fees in the six months to December 31 (R438 million), with net interest income at R268 million.

Its non-interest income compares well with the four full-service banks, but in terms of overall revenue per customer it’s sitting at around half of the average of the ‘Big 4’.
The opportunity to close this gap will remain somewhat limited by its product suite (it has transaction, savings, card and lending businesses).

New clients

Adding new clients is paramount and Discovery has managed to add a bigger proportion of high-income earners in the past year. In the six months to end-December, one in five new clients earned more than R50 000 a month, versus one in eight a year ago.

Half of its new customers are middle-income earners (R10 000 to R50 000 a month), unchanged from a year ago.

Also, an increasing number of new customers are signing up for (more profitable) credit card and banking suite products. In the most recent six months, this accounted for 18% of sales. A year ago, this number was 10%. The bulk of new customers – around two in every five – are (less profitable) pay-as-you-transact ones.

In the card market, it is issuing 15% of new credit cards – a massive jump from the 5% a year ago.

The Vitality shared value model drives additional income from clients, with non-interest revenue from silver, gold and diamond Vitality Money clients 1.5 times higher than those whose status is blue (and this is after the cost of incentives).

Gold and diamond customers have a 94% lower arrears rate than those who are on blue status, while this top cohort also has deposits that are nine times higher, on average.

So far, the group has invested a total of R10 billion in its banking venture.
This includes the R6 billion it spent on regulatory capital, build capex and the R3 billion payment to FirstRand to exit its banking and card joint venture. It also includes the cumulative operating losses that have topped R4 billion since 2018.

In the last financial year (to June 2022), it reported an operating loss of R990 million. There is a tax benefit to these losses, however. Last year, this offset its loss by R218 million. In the most recent six months, there was a R110 million offset.