Discovery’s R15 billion bet

Discovery has invested R15 billion in building its banking offering so far, and this bet is beginning to pay off as the bank begins to generate profit. 

Discovery Bank has grown strongly since it launched in November 2018 with just a credit card offering, reaching one million clients two years ahead of schedule. 

The bank has also steadily grown its offerings to include savings accounts, solar financing, and home loans, launched in May 2024. 

This has made it the first full-service digital bank in South Africa. Discovery Bank CEO Hylton Kallner told Daily Investor that it has no plan to emulate ‘skinny banks’ that offer a low-level service. 

Building a full-service bank in less than a decade has not come cheaply. Discovery has pumped R15 billion into the bank since its inception. 

This was the most significant investment the financial services giant made during the past decade, and it was dedicated to investing heavily in its new offerings to drive future growth. 

The company’s next phase of growth is heavily reliant on the bank’s profitability, which will enable its cash generation to improve, pay down debt, and increase its return on equity. 

Discovery’s R15 billion bet on its bank is beginning to pay off. In January 2025, the bank reached profitability ahead of target. 

Crucially, Kallner said that the bank is profitable even after hefty New Business Acquisition Costs (NBAC), which have been the biggest expense since launching. 

Kallner explained that Discovery Bank currently spends around R35 million to R40 million a month on NBAC alone. 

If NBAC is stripped out, the bank will generate a substantial operating profit and be on track to reach its R400 million a year target.

“The momentum the bank has got is very strong. If we were to stop writing new business today, for whatever reason, you would see a profit of around R40 million a month emerge,” Kallner said. 

This is vital for the bank to become self-standing and require less capital from Discovery at a group level. 

Kallner said the crossover point is expected sometime in 2026, when the bank will no longer require any capital from the group. 

Discovery has lofty targets for its bank. It expects operating profit growth of R400 million per year over the short term. 

By 2029, it expects the bank to generate R3 billion in profits and contribute significantly to the group’s bottom line. 

“The R3 billion profit is a big number, and there is a lot of work to be done between now and 2029 to ensure that we achieve that,” Kallner said. “Reaching profitability ahead of schedule gives us confidence that we are on track.” 

Kallner explained that the bank could quite easily grow faster by chasing advances and rapidly growing its loan book. 

However, this would require it to sacrifice its high-quality client base and make it increasingly sensitive to interest rate changes. 

“We are not chasing advances. We are growing the book prudently and conservatively, focusing on quality over quantity.”

“Our product set tends to attract high-quality clients that manage their money well. That is not necessarily only affluent clients. It extends to a broad cross-section of the market of clients who are lower-risk, regardless of income.” 

What enables the bank to focus on quality and not rely on advances as much as its traditional counterparts is the fact that non-interest revenue makes up the majority of its earnings. 

“We are a non-interest revenue-driven business. I think that reflects strong customer engagement and that our advances have been relatively small,” Kallner said. 

“As advances grow, our home loan product gains traction, and then you will start to see interest revenue increase.” 

“At the moment, we are higher on non-interest revenue. This is very good from a risk standpoint and for the quality of our earnings.”

Crucially, strong non-interest revenue reduces the bank’s sensitivity to interest rates and the need to take on riskier clients to grow earnings.