Discovery Bank doing well – but it has a big obstacle

Discovery Bank has shown strong growth over the last four years, but mounting net losses are something the financial institution must overcome.

Discovery launched its banking service on 14 November 2018, marketing it as the world’s first fully digital behavioural banking platform.

Discovery Bank incentivises its clients to make healthier financial decisions and work more responsible with their finances.

It achieves behavioural change through Vitality Money which rewards clients for positive behaviour.

Vitality Money can be used on rewards like a dynamic interest rate increase, getting up to 100% back on HealthyFood, and a 75% discount on HealthyCare.

The Discovery Bank app also rewards users for spending their money responsibly with Vitality Active Rewards.

Discovery CEO Adrian Gore said Discovery Bank is expected to grow to 700,000 clients by 2024, which is projected to be their breakeven point.

Last month, Gore said they are signing up close to 1,000 new clients daily and exceeded 1 million accounts in August 2022.

“The growth is staggering, and the quality of the client base in terms of usage is staggering,” he said.

Gore added that they are on track to reach breakeven in 2024, and beyond that, it will create tremendous value for shareholders.

Discovery Bank client base

Discovery Bank has rapidly grown its client base over the last two years – increasing from 274,000 in 2020 to 470,220 in 2022.

This trend is set to continue at the current rate of around 1,000 new clients per day.

The chart below shows how Discovery Bank’s client base has increased over the last two years.

Discovery Bank deposits

Since its launch in 2018, Discovery Bank has grown deposits from customers at an average growth rate of 535% per year.

Deposits are a good growth measure as a portion of the deposits are used to finance loans for other clients.

In Discovery’s latest financial statements, the bank reported R10.9 billion in customer deposits.

The table below shows Discovery Bank’s deposit growth since its launch four years ago.

Discovery Bank loans

Most banks derive their primary income from interest payments by borrowers on loans from the bank.

Client loans can, therefore, be viewed as a core operating asset for a bank, while deposits can be viewed as operating liabilities.

A bank’s spread on the interest paid to depositors and the interest received from borrowers is the income it generates. 

If the credit quality of the client base is well managed, a larger pool of borrowers is a good sign.

The chart below shows how Discovery Bank client loans have increased since 2018.

Discovery Bank operating profit/loss

Discovery Bank is still making an operating loss of R990 million, as reported in its 2022 financial statements.

However, it has managed to decrease its operating loss by R280 million over the last two years, indicating that the company is moving in the right direction.

The chart below shows Discovery Bank’s operating losses from 2020 to 2022.

Discovery Bank retained earnings

Discovery Bank’s growing client base, higher deposits, increase in loans, and narrowing operating loss bode well for its prospects.

However, it has a big obstacle to overcome – Discovery Bank is still experiencing huge net losses.

A company’s retained earnings are a measure of the net income it holds back in the company after paying out dividends to shareholders.

It is calculated as follows:

• Year-end retained earnings = (Beginning of year retained earnings) + (Net income or loss) – (Dividends)

If a company makes a net loss or it pays out more in dividends than it earns in net income, its retained earnings would deteriorate.

Discovery Bank’s decreasing retained earnings, therefore, signal continued net losses.

The chart below shows how the bank’s retained earnings have fallen from -R493 million in 2018 to -R2.94 billion over the last five years.

From 2021 to 2022, Discovery bank’s retained earnings decreased from -R2.16 billion to -R2.94 billion. This means it had a net loss of -R776.42 million in 2022 compared to the 2021 net loss of -R735.29 million.

The chart below shows Discovery Bank’s net loss over the last four years.

It reveals that while the net loss decreased from R800 million in 2020 to R735 million in 2021, it increased to R776 million in 2022.

The last word

Discovery Bank has indicated strong growth in its client base and managed to lower its operating losses.

Although its client base grew by 30% from 2021 to 2022, the bank has not been able to improve its net losses, which increased from -R735.29 million to -R776.42 million.

Discovery Bank would have to ensure its client base growth translates into an improvement in net profits to grow a strong business.