From zero to R3 billion in five years

Discovery Bank aims to go from breaking even in the second half of its 2024 financial year to generating R3 billion in profits by the end of the 2029 financial year. 

This assumes a R400 million growth in operating profit per annum over the next four years, which the bank is on track to achieve. 

Since launching in November 2018 with only a credit card, Discovery Bank has gone from strength to strength. 

It was created with the aim of disrupting South Africa’s banking industry by using Discovery’s Vitality platform and by offering wealthy clients superior service.

As the bank has steadily launched new products, its revenue has skyrocketed, and its profitability has neared. 

Crucially, in the second half of the year to the end of August 2024, the bank achieved operational breakeven for the six-month period. 

However, it remained unprofitable across the past financial year, posting a loss of R454 million. Discovery CEO Adrian Gore said this performance still exceeded expectations, with the loss narrowing by 41%. 

The bank is expected to be profitable in the next financial year, as its net income per client is now above the cost per client. 

Discovery Bank CEO Hylton Kallner told Daily Investor that the bank will still need some capital from the group to fund its new business acquisition costs. 

“We have been clear to the market that there is still significant growth and new business strain in the bank. There will probably be one financial year further of capital investment into the bank,” Kallner said.

This translates to around 18 months of future investment that is required, after which the bank will be full self-sustaining and cash-flow positive. 

Kallner expects this crossover point to occur in the 2026 financial year, after which the bank will contribute positively to the group’s earnings. 

In the company’s results presentation, Discovery outlined its targets for the bank, with it expected to grow its operating profit by R400 million per annum over the next four financial years. 

By the 2029 financial year, the bank is expected to have two million clients and generate R3 billion in profits. 

Kallner explained that, despite these targets, the bank will not pursue growth at all costs and will not compromise its high-quality client base. 

He expects the bank to continue growing at its current rate through the organic growth of its client base and by launching new products, which can then be sold to existing clients. 

Discovery Bank has managed to continue attracting high-quality clients to its platform by leveraging the wider group’s existing customer base. 

However, it is also increasingly attracting affluent customers from other banks, with around 60% of its clients completely new to the Discovery ecosystem. 

A big driver of this is its new home loan offering. Over 80% of these clients have switched their home loan from an existing financial services provider. 

With the launch of new products, the bank is increasingly becoming a platform on which it can cross-sell its own products as well as those from other parts of the Discovery business. 

“If you think we just started with a credit card and within six years, we have added revolving credit facilities and home loans,” Kallner said. 

Personal loans are the next product set to be launched in early 2025, almost completing the bank’s retail offering. 

“I think given both the organic growth of the bank and additional products we make available to the client base, we can continue to grow this next phase and into the medium term without compromising quality.” 

“That is certainly our intention. We have always said we would rather grow a little bit slower but do it in a way that is prudent and of very high quality.” 

Kallner has previously said the bank has no intention of expanding into vehicle and asset finance as it does not think it can offer its clients value in this space. 

A new era

The bank becoming profitable and self-funding is central to Discovery’s new phase of growth, whereby the group will not have to fund its new initiatives as much as previously. 

This will enhance cash flow and enable the company to return cash to shareholders or look for new opportunities. 

CEO Adrian Gore referred to this as the third phase of growth for Discovery and is critically important for the company to become a mature business that can have sustained growth for the long term. 

As the bank achieves profitability in the next financial year, it will require significantly less funding from the centre, resulting in much-improved cash generation. 

Another key focus area for Gore in this new phase is ensuring its established businesses grow at CPI + 2% to 5% annually. With less cash burn in its new ventures, this will again boost cash generation. 

Improved cash generation will enable the bank to pay down its debt, reduce its gearing, and invest strategically to tap into new growth opportunities.

This phase will also be characterised by the bank becoming a ‘composite maker’ whereby it becomes the digital platform through which Discovery clients engage with all their products. 

Kallner explained to Daily Investor that this is being done because the bank is the company’s most secure platform and has the infrastructure to facilitate client activity across the group. 

Crucially, it is the hub which has the most data about Discovery’s clients through transactional banking and the payment rails used for its Discovery Miles ecosystem.

With the bank attractive 1,200 new clients a day, of which 60% are completely new to Discovery, it also becomes an increasingly important platform to cross-sell the company’s other products.