Discovery Bank, the upstart that’s been trading for little over a year, reported a R1.171 billion loss before tax for the year ended 30 June 2020.
This comprised more than half the total operating loss for the group’s new initiatives, which include Vitality Invest (it’s replicating the Discovery Invest model in the UK), Vitality1 (the IP chassis which it licenses out to global insurers), the new umbrella funds business locally, and Discovery Business Insurance.
It describes the operating performance of the bank as “pleasing” with total spend to date on its entry into banking of R4.5 billion.
This burn rate is almost exactly in line with expectations.
The group is on the record as saying it needs “roughly 500 000 to 600 000 clients” to break even.
By September 14 (post year-end), it was halfway there, with 276 000 clients and 490 000 accounts. A big chunk of the uplift came in the last four months when it completed the migration of the original Discovery Card joint venture accounts from FNB. It says it has migrated 223 000 of these accounts. Of concern to Discovery will be the fact that it has more migrated accounts which are still on the “old” Discovery Card as accounts linked to customers who are new to the bank. Converting (“upgrading”) these clients to full Discovery Bank accounts is proving to be a grind.
In a segmental breakdown, the group discloses that it generated R150 million in net banking fee and commission income. On a gross basis, the figure was R182 million. That is not bad going, considering it only had around 150 000 accounts at the half-year mark. With a full year ahead and already around 500 000 accounts, that fee income will start to look a lot healthier. It earned a further R121 million in Vitality income across its banking clients in the year. Total net income was R684 million.
It says the quality of its loan book is excellent – not surprising given that half its client base is categorised as “most affluent”. Arrears may be 60% lower than the market but are definitely elevated given the impact of the Covid-19 pandemic and the lockdown. These are at around 6%, from 2% in February.
It booked a surprising R181 million in credit impairment charges for the year on (actual) advances of R2 billion. However, it had total credit limits granted of R5.5 billion. By mid-September, advances had grown to R3.56 billion (following the completed migration from the JV). The market will have a better view of the book – which was heavily impacted by the migration – by the interim stage.
Discovery is at pains to highlight that retail deposits alone exceed the loan book, “resulting in significant liquidity”. Add both wholesale and retail funding together (R6.25 billion) and the bank has a R2.7 billion surplus (excluding capital). Nearly two thirds of deposits are from Vitality Money customers who are on Diamond status. Given the dynamic interest rate pricing (the better your status, the higher your savings rates and lower your credit interest rates are), this is not all that surprising.
This “deposit-led growth strategy” is a stated priority for the group “given the onset of Covid-19”. The other two were completing the migration of the JV book and “ ensuring rapid learnings from the Shared-Value model to constantly improve the Bank’s user experience and value proposition”.
To this end, it has refined the Vitality Money proposition and interface. The core philosophy – which rewards clients for ‘banking healthier’ (in other words, driving behaviour change) – stays the same. The dynamic interest rate rewards on both savings and credit as well as the earning of Discovery Miles (as well as boosted Vitality discounts) remains.
It has tweaked how the bulk of this is presented, making it easier for customers to understand their status and “financial behaviours and scores and the impact on [their] interest rates”. The financial behaviours are the same (savings, debt, insurance, retirement and property), but it has introduced “nudges” to explain how, for example, saving more would boost one’s status. It says these changes will be announced later this month.