The South African bank taking on the Big Four – and winning 

Discovery Bank’s home loan offering continues to grow strongly, successfully getting South Africans to switch their mortgages from other providers. 

The offering has only been available for the past financial year and is part of the bank’s efforts to build a full set of banking services. 

Discovery Bank launched personal loans towards the end of its financial year to complete its product suite, with it now focusing on scaling engagement in these products. 

The success of its home loans product, operated in partnership with SA Home Loans, is one of the key focus areas for the bank in the coming years. 

It is pivotal to grow its advances book, which remains less than half the size of its deposits, and grow its net interest income. 

Discovery Bank CEO Hylton Kallner told Daily Investor that the bank’s home loan book has managed to grow to over R2.2 billion in its first year of operations. 

Crucially, the bank has proven its ability to win over clients with existing home loans, with the offering not being available to individuals without a Discovery Bank transaction account. 

“The offering is still very much dominated by switches from clients with existing bonds. That is approximately 80% of the business and the loan book,” Kallner said. 

This means that only 20% of the home loans offered by Discovery Bank are to individuals who do not have an existing mortgage.

Furthermore, Kallner explained that the switched client is, from Discovery Bank’s perspective, a lower-risk client for the bank. 

“From our perspective, the switched client is obviously a much lower-risk client. The pricing that we are able to offer by understanding the client and the risk through our behavioural models has resonated,” he said. 

“The quality has been excellent, and it is still early days, but it definitely has been a very, very good rollout from our perspective.” 

Kallner added that nearly all of the individuals with home loans at Discovery Bank are main-banked clients, meaning much of their activity occurs within the bank. 

“The home loans are associated with very, very high ancillary banking products as well. There is some causality there, with it only being available to existing clients, but virtually everyone is primarily banking with Discovery Bank,” he said. 

The graph below shows the growth of Discovery Bank’s home loans product and its significantly lower credit-loss ratio compared to its competitors. 

Taking on the Big Four

Discovery Bank has grown rapidly since its launch in 2018 without much impact on South Africa’s incumbent banks. 

Discovery CEO Adrian Gore is betting on the bank’s continued scaling to drive the company’s efforts to double its operating profit by the end of 2029. 

This continued scale will make it the growth engine for Discovery in South Africa, becoming the effective entry point for clients into the ecosystem and their primary interface. 

Kallner said the bank is already at this inflexion point, with it set to begin adding more clients to the Discovery ecosystem than it converts from the company’s existing base. 

To achieve its goal of R3 billion in profit by the end of the 2029 financial year, Discovery Bank will have to continue its run rate of adding around 1,000 clients a day in the coming years. 

This, along with ensuring the bank can sustain its elevated level of client engagement and product uptake, will be a tough ask. 

Gore told Daily Investor that Discovery Bank has been able to grow rapidly without noticeably impacting South Africa’s incumbent banking giants. 

However, this does not mean they are not taking the bank seriously as a competitor, with some incumbents overhauling their private banking business in recent years. 

“To be fair to them and us, they have always given us credit for what we offer and for keeping an eye on our growth. So, we have not exactly come from behind unnoticed,” Gore said. 

“They have always been unbelievably razor sharp in competing with us, and there is nothing new in that. But do they pose a risk? Of course they do. Our banks are excellent. They are a hell of a competitor.” 

However, Gore believes that Discovery Bank has an edge as a new entrant to the market that is uninhibited by legacy issues. 

“Other banks do have some technology issues at that scale or with their legacy systems. Some of that stuff is not easy to do. We have to continued to innovate, and there is no hubris at all from our side,” Gore said.