Discovery is licking its lips — probably on organic or free-range produce from a niche local retailer — as it anticipates entering the mainstream loan market next year. With some extra Chinese quinoa to enrich the palate.
Despite what one might think is a saturated banking market, what makes for an enticing outlook is that clients at Discovery’s rapidly growing bank seem to have deep pockets to start off with.
“It will take time, but I think we have a proposition that is very compelling,” Discovery CEO Adrian Gore, who has been at the helm since he founded the financial services group 31 years ago, tells the FM.
According to Discovery’s calculations, its more than 700,000 banking clients have about R250bn in outstanding home loan balances with other lenders. Discovery Bank will launch home loans to clients from the first quarter of next year.
On Tuesday, Discovery Bank CEO Hylton Kallner informed clients they could get up to 1.5 percentage points off their home loan interest rates with good management.
“We are not going [into the mortgage market] on a commoditised basis,” Gore says. “Our offering will be appealing. [But] these are big numbers. If you deal with a couple of thousand mortgages, you’re dealing with billions.”
Looking at the bank’s existing credit customer base, more than half of the volume of accounts are owed by super prime clients, compared to the overall market’s third.
This is also borne out in the non-interest revenue Discovery Bank earns per customer, at R1,842 the second highest in the market, according to a presentation Gore delivered after the release of the company’s full-year results last week. He didn’t mention who the biggest earner of non-interest revenue was.
“The client growth is staggering, and the usage of the bank is incredibly high,” he says. “Client growth was faster than expected. Once the client starts using the bank, they start depositing money.”
With the average number of new clients exceeding 1,000 a day since September, it is no wonder that retail deposits — a cheap source of funding for banks — jumped 36% to R14.3bn at the end of June. Advances, which is primarily through credit cards, rose 22% to R5.2bn. According to the company’s financial statements, the momentum in credit card sales saw Discovery Bank take 15.3% of the market in the three months to end-June.
Still, Granate Asset Management analyst Tyron Green says: “You don’t just switch a home loan. It is expensive to do so.”
He’s also worried about the quality of the new credit card customers.
“Credit growth in South Africa is slowing down,” he says. “Nonperforming loans have been increasing [at Discovery Bank], showing it has increased lending to lower-quality customers.”
This is a general South African issue FirstRand CEO Alan Pullinger alluded to two weeks ago when his company reported full-year earnings. “We expect a pullback in credit card loans,” he said. “Consumers don’t like expensive debt.”
In the meantime, Gore is enjoying Discovery Bank’s newfound traction.
“We’re getting increased velocity,” he says, with reference to the large chunk of quality customers Discovery Bank is hauling in. It’s one of the reasons the banking unit reduced its operating loss to R767m for the year to end-June from R990m a year earlier.
Another sigh of relief for Discovery shareholders was the turnaround at Ping An Health. Discovery owns about 21% of the Chinese company, which sells health insurance in the world’s most populous market.
“We’re scratching the surface in China,” says Gore, and adds that the country’s growing middle class, despite slower economic growth, supports his positive outlook for the investment.
“In addition, Ping An is very diligently run,” Gore says. Ping An’s pretax profit jumped 39% in rands to R3.4bn, with Discovery’s cut at R849m, compared with a year earlier. Even as Ping An’s written premium increased by a paltry 2% to 19.6-billion yuan, it translated to an 11% jump in rands to R50.1bn.
Calculating Discovery’s proportion of the premiums at about R10bn, it now compares with Discovery Health’s R10.2bn revenue in South Africa.
What also makes Ping An stand out is its superior profit margin of 4.8%, compared with competitors The People’s Insurance Company of China’s 1.2% and Fosun Health’s 1.8%.
With the last dividend paid before the pandemic, Discovery’s board declared a R1.10 a share payout for the second half of the fiscal year
In all, Discovery’s headline earnings rose 5% to R5.49bn for the year as normalised profit from operations surged 24% to R11.66bn.
But what made the results announcement so appetising was the return of the dividend. With the last dividend paid before the pandemic, Discovery’s board declared a R1.10 a share payout for the second half of the fiscal year.
“In our calculations, 90% of the company is established business with 10% emerging business,” Gore says.
“Existing companies should pay out between two and three times coverage and emerging companies should have nothing.”
According to Gore, the expectation should be five times cover for the whole company, close to what the dividend was worth. “We believe we set a level that we can grow off,” he says.
Green, however, says Discovery should focus on cash generation in its businesses and that it may “not necessarily be the right thing to do while still growing”.
Still, Discovery has certainly rekindled investor faith. Over the past year, its shares have jumped 39% compared with the FTSE/JSE all share index’s 13.7% increase. Still valued dearly, Discovery trades at a p:e of 17.5 and dividend yield of 0.75% compared with Sanlam’s p:e of 12.7 and dividend yield of 5.3%.
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