The South African bank shooting the lights out

Discovery Bank has reached profitability ahead of target and is set to continue on its rapid growth trajectory as it wins over clients from other banks. 

Discovery’s financial results for the six months ended 31 December 2024 outlined the bank’s strong performance. It is the first set of results since the company entered its new phase of scaled organic growth. 

In this phase, Discovery plans to grow its profit at an annual rate of between 15% and 20% while significantly reducing its spending on new businesses. 

Much of this is predicated upon its bank reaching profitability and not requiring significant capital from the group level. 

This should free up cash flow, improve Discovery’s return on equity, enable it to pay down debt and insulate it from external shocks. 

Ultimately, it ensures that Discovery can maintain its long-term view and be unfazed by short-term fluctuations in economies and markets. 

“We are not a trading company. We are operators. We do not make trading decisions for short-term wins. We make operating decisions for the long-term future of Discovery,” CEO Adrian Gore explained to Daily Investor. 

Much of Discovery’s success in this new phase depends on the performance of its bank, with the company investing over R14.5 billion in setting it up. 

Gore said the bank has broken into profitability and requires far less capital from the broader group to operate. 

While this profitability was not reflected in the interim results, it will be evident in the second half of Discovery’s financial year. 

While the bank hit monthly operational breakeven in early 2024, this excluded new business acquisition costs. Now, the bank generates enough capital to fund its own expansion, freeing up significant cash flow at a group level. 

“The bank has been operational break even over the last six months or so. Now, it has broken into profitability completely. So it is simply throwing out cash,” Gore said. 

For the six months, the bank slashed its loss in half to R145 million and managed to sustain its run rate of over 1,200 daily sales per business day. 

Its client base grew by 32% to 1.1 million, with each individual having over two accounts with the bank. Deposits grew 27% to R21.2 billion, while advances shot up 37% to R7.8 billion. 

“I mean, basically, the bank shot the lights out,” Gore said.

Gore previously explained to investors that the bank’s future growth is likely to come from strong growth in advances and credit rather than the launch of new products. 

Following the interim results presentation, Gore told Daily Investor that the bank can easily continue growing at its current rate without sacrificing its high-quality client base. 

This is primarily due to its very conservative loan growth, with advances being significantly lower than deposits. 

Gore admitted this may raise the question of the bank being overfunded but explained that it would not sacrifice its high-quality client mix for faster growth with additional risk. 

Discovery Bank’s credit loss ratio is at 3% on a through-the-cycle basis compared to the market average of around 5.5%. 

“We think we can continue to grow strongly in this fashion, with recent credit growth being of extremely high quality and loan growth accelerating.”

Central to this growth has been the bank’s home loan offering in partnership with SA Home Loans, which has gone from strength to strength in the past six-month period. 

As of 31 December, Discovery Bank had a 2% market share in this sector but crucially had a switching market share of 9%. 

This means that most individuals accessing Discovery Bank’s home loans are switching from an existing lender. 

While its market share is small, the value of home loans disbursed has skyrocketed from R149 million in September 2024 to R1.04 billion as of January 2025. 

The bank has also not fully tapped into its existing client base yet, with Gore saying it only has a small share of Discovery Bank account holders’ total borrowings. 

“If you just took our current clients and we get more of what they borrow from other banks, it would drown out what we currently have,” he said.

However, perhaps the bank’s greatest value is in its role as a composite maker for the rest of Discovery, as it brings clients in from outside of the company’s existing client base. 

The bank’s data shows that around 65% of its clients are completely new to Discovery. This not only means it is winning over clients from existing banks but is opening up the company’s medical aid and insurance products to new clients. 

Gore explained that, in time, most of Discovery’s products will sit on the banking app as it has the highest level of security, all the payment rails needed, and is easily accessible. 

“People use the banking app all the time. They do not use other apps at all. So, we see insurance companies building these huge apps, and no one ever uses them, but people use the banking app all the time.” 

“So, in time, on the banking app, all the other Discovery products will appear, using Discovery Miles as a common currency for incentivisation.” 

“So, all the products will sit on the face of the bank. As you scroll around the banking app, you will see all of your products. At the moment, it is just information and data, but soon it will be much more functional.”