The market may have already been primed to expect strong earnings, but a bigger-than-expected dividend and a first full-year profit from Discovery Bank have given investors fresh evidence that Discovery’s investments are paying off.
Discovery Bank swung into a R370m operating profit, compared to a loss of R68m last year, and now serves nearly 1.6-million customers. That helped lift normalised operating profit by 17% to R17.75bn for the year ended June, with its South African businesses up 16% and the Vitality portfolio up 21%. Cash conversion rose to 85%, helping the group lift its full-year dividend to 384c per share.
“The results were very, very strong,” CEO Adrian Gore tells the FM. “It’s the second year of our five-year cycle. We’ve seen good deleveraging and a strong dividend payout. So the results were very much in line with what we predicted, even slightly ahead.”
Shaakir Salie, head of research at Aeon Investment Management, says the operating performance itself was not a major surprise after Discovery’s pre-results trading update. But one thing did stand out: “The dividend, up 33%, positively surprised investors, reflecting the new phase of robust cash generation,” says Salie.
He says investors would also be encouraged by the level of growth across Discovery SA and Vitality, but he singles out the banking business as one of the most important developments.
“The bank’s progress has been remarkable,” he says.
Clearly, its digital-first model is paying off. Costs per customer fell while revenue per customer increased. Still, investors will be watching the progress towards management’s ambition to reach R3bn profit by 2029. And, says Salie: “They shouldn’t expect that climb to be a straight line.”
Into the ecosystem
This is why Discovery’s so-called “Super Bank strategy” is key. It’s intended to pull banking, health, insurance, and investments into a more integrated ecosystem. Gore says that about 1,000 customers were joining Discovery Bank every day, of which 70% weren’t existing Discovery members.
“It’s quite remarkable. That is part of the reason why the Super Bank strategy works, because you’re sucking these people into our ecosystem,” he says.
There is considerable room to move the other way too. Gore estimates that fewer than 25% of Discovery’s existing customers currently bank with the group. “So, going from both sides, there’s potential for massive growth.”
However, the plan is not simply to cross-sell more Discovery products to banking clients. Rather, the aim is to create enough value across the group’s different offerings so that customers choose to use more of them, more often.
“Discovery Bank’s positioning around full service, with proper digital capabilities, AI and data, has given us a very powerful capability,” says Gore. “I think we are uniquely competitive at the moment, and that’s driving our growth.”
Outside South Africa, Vitality’s UK business was a standout performer, while China’s Ping An Health continued to contribute strongly. Salie says VitalityHealth’s recovery appears to reflect decisions taken over several years to improve pricing and the quality of its client base.
“The strong result also reflected the benefit of their shared-value model, as healthier members are claiming less and staying longer,” he says. “So perhaps this points to a more durable performance than the market expects.”
AI amplification
Gore points to R2.2bn of claims savings above expectations across the group as evidence of the economics behind the Vitality model. Discovery and its partners measured about 725-million “healthy activities” during the year.
R17.2bn was returned to clients through its shared-value model, including premium reductions, cashbacks, paybacks and other benefits — roughly equivalent to the group’s operating profit.
“So it’s almost as if shareholders and customers received the same value,” says Gore.
Discovery is already moving on to its next big projects. Alongside the Super Bank strategy, the company is pushing Vitality AI, which will launch with Google in New York in two weeks. This is a platform that will sit across Vitality’s existing programmes, and uses artificial intelligence alongside Discovery’s health and behavioural data to deliver more personalised health guidance and engagement to customers.
Salie thinks it’s potentially one of the more exciting parts of the international story. Vitality AI is costing Discovery around R300m a year, but “it could become another Discovery Bank story”.
“Discovery owns a rich and valuable set of behavioural and health data, and AI only amplifies that value,” Salie adds.
Gore recently published The Four Principles, a book about the ideas he says have shaped the way he thinks about decisions, risk and growth. One of them is the “Pareto tail”, which is the notion that a small number of decisions can have an outsized effect on everything that follows.
“I’m hoping that the Super Bank and Vitality AI are tail events,” says Gore. “In other words, they’ll create this discontinuity that changes everything.”