FNB appears unfazed by the imminent sale of Discovery Card and its R4.3 billion credit card book, operated through a joint venture with insurance group Discovery.
The joint venture, dating back some 15 years, is set to come to a close as the insurer prepares to launch its own bank by year-end. At present, Discovery owns a 74.99% interest in the business with FNB parent company FirstRand holding the remaining 25.01%. It is to buy out FirstRand’s stake in the credit card and shareholding in the soon-to-be launched bank for R1.8 billion.
Discovery Card, with its 300 000 strong customer base, is widely regarded as one of the best performing credit card books in South Africa due to the low risk profile of its customers. At the half year mark, its credit loss ratio stood at 1.5% compared with a 6% market average for tier 1 credit providers. In its latest annual financial results, Discovery showed a 17% increase in profits for the joint venture to R414 million and a 6% increase in revenue to R1 billion. Although Discovery did not detail full-year performance of the credit card book, it said its non-performing loans and cost-to-income ratio were “significantly below the average of other South African banks”, adding that its customer base was also less sensitive to negative market conditions due to its “substantially better” risk.
But FNB chief executive Jacques Celliers says the performance of his own bank’s credit card book will not be affected by the joint venture’s close and attributed some of Discovery Card’s success to FNB. “We are very proud of the business that we built up for Discovery and the client base,” he says. “Credit books and markets are full of stakes and over time we have been a great partner for Discovery in leveraging our credit skills and capacities – it is exactly because we do so well on the FNB side that the Discovery book has benefited so much.” He adds that there would be no deterioration in FNB’s book, which he says is equally strong.
FirstRand reported an improvement in the credit loss ratio of its unsecured retail operations to 2.36% from 3.05% during the year to June 30, 2018. FNB is also significantly strengthening its mid-to-high income customer base, having reported a 17% annual increase in “more resilient” premium customers as its strategy around up-selling products to existing customers matured.
Read: FNB defies recession
The relationship between Discovery, once part of the FirstRand stable, and FNB is due to end as the Registrar of Banks requires FirstRand’s crossholding in Discovery Bank to be reduced and ultimately exited over a five-year period. The parties have agreed to do so “as soon as practically possible,” according to Discovery.
In presenting its financial results to analysts, FirstRand chief executive Alan Pullinger explained why it chose to sell out upfront. “The optionality of having the stake in the bank, we get that monetised for us today upfront, in cash [and] without any risk. We think it is a good proposition for our shareholders. Yes, you could have said that that stake could have been worth a lot more in this new bank and I understand that. But that comes with a huge amount of risk as well. The fact that it gets monetised today [makes it] a cleaner transaction and allows us to go our own separate ways and compete actively in the market, which we have every intention to do.”
As at June 30, 2018, FirstRand valued the advances in the Discovery Card book at R4.3 billion, which it says would be transferred at carrying value at an appropriate time.
Discovery chief financial officer Deon Viljoen says the value of advances in the credit card book was funded by various sources typical to banking, such as retail deposits. “This is core to the operations of the bank and will not require additional funds to be raised.”
The insurer has said it will raise funds to buy out the credit card joint venture for R700 million and FirstRand’s shareholding in the new bank for R1.1 billion through an equity issuance.