Discovery takes a hit from South Africa’s high interest rates

Discovery expects a significant increase in earnings for the 2023 financial year, but this growth was muted by South Africa’s high interest rates and other macroeconomic headwinds.

Discovery released a voluntary trading update this morning, informing shareholders of its earnings expectations for the 2023 financial year.

The company expects the following changes from the 2022 financial year –

  • Normalised profit from operations is expected to increase by between 22% and 27%.
  • Headline earnings are expected to increase by between 3% and 8%.
  • Normalised headline earnings are expected to increase by between 30% and 35%.

Broken down by the company’s different composites, Discovery expects the least growth in its UK composite’s normalised profit from operations – 18% to 23% – and the highest in its Vitality Global composite – 72% to 77%.

In its UK composite, Discovery said VitalityLife performed strongly, with profit boosted by positive operating variances, benefiting from significantly higher premium inflation indexation. 

However, VitalityHealth’s profits declined slightly off a robust prior result, given elevated new business strain from strong sales and the industry-wide return of PMI claims post-Covid-19.

Vitality Global delivered strong growth in operating profits, given a strong recovery in investment returns for Ping An Health Insurance during the second half of the 2023 financial year, combined with continued strong operating delivery.

Discovery expects its South African composite’s normalised profit from operations to grow by  20% to 25%.

The company said businesses across this composite all delivered strong growth, with Discovery Bank “continuing to deliver excellent progress across all metrics, as the acquisition of quality clients accelerated over the year.”

However, Discovery said the reporting year coincided with considerable macro-economic volatility, with significant movements of interest rates within the markets in which Discovery operates. 

While the headline earnings impact of higher rates in the United Kingdom was more muted over the reporting year, the sizeable increase in both real and nominal interest rates in South Africa had a more pronounced impact on headline earnings.

“As in prior reporting periods, the increase in interest rates creates volatility in Discovery’s headline earnings but has no impact on the operations of the Group, with little impact on the Group’s liquidity, cash flows and solvency,” the company said.

“Consequently, the Group has a stated policy of normalising for the impact of interest rate movements in the presentation of normalised headline earnings.”

Therefore, Discovery expects the following earnings changes compared to the previous period – 

  • Earnings per share (EPS) are expected to be between 3% and 8% lower.
  • Headline earnings per share (HEPS) are expected to be between 3% and 8% higher.
  • Normalised HEPS are expected to be between 30% and 35% higher.

Discovery is expected to report its annual 2023 financial results on or about 21 September 2023.