From nowhere, the fledgling Old Mutual Bank is set to sign up its millionth customer in the next few weeks. This is perhaps the most surprising revelation in the half-year results of the stately 181-year-old life insurer and gives a clue as to its future direction.
For Jurie Strydom, who has been CEO for 15 months, these half-year results are a notch on the recovery path of a company that once dominated the business sector and is looking to rebuild both scale and credibility.
The numbers seem impressive enough. While overall earnings fell 27%, pulled lower by the Iran-ravaged stock markets, which hurt shareholder investment returns, the trajectory of the operating business was the brightest in years.
“We’ve got a capital base of R30bn, so shareholder investment return there will always follow markets,” Strydom tells the FM. “What people are looking at is the underlying operating performance. New life sales is the most important indicator; it has risen 21%. And operating profit per share is up 11%.”
Investors, predictably, liked it, as Old Mutual’s share price rose 2.58% to about R13.14. That’s a far cry from its pre-war high of R17 in February, but still.
“We are where I would have hoped to be at this point,” Strydom says.
Though some might argue it is actually ahead of expectations, there are doubts that Old Mutual — calibrating for the multinational juggernaut it once was rather than the slimmer version of today — could ever revive its glory days.
But that would be to bet against Strydom, an actuary with an MBA from the Massachusetts Institute of Technology, whose experience at the top level at Sanlam, Alexander Forbes and Imperial gives him uncommon insight into the sector.
On a call to investors, Strydom laid out a philosophy that, if implemented, would reduce the discount that lingers over the stock: Old Mutual is “going to become a company that is famous for doing what we say we are going to do”, he said.
There will be no better test of that than the big ambitions for Old Mutual Bank.
When Old Mutual first announced plans for a bank, scepticism abounded — not least because of the enormous costs involved: annual losses of between R1.1bn and R1.3bn for the first three years until breakeven in 2028. And that’s before you even consider the glut of new banks out there, from Discovery Bank to GoTyme, Bank Zero and Pep.
Yet, to hear Strydom tell it, Old Mutual Bank has flown out of the gates.
“We are going to hit the 1-million customer mark in the next couple of weeks, and deposits are already up, at R1.6bn,” he tells the FM.
This figure needs explanation, though. For one thing, a large number of those clients came from Bidvest Bank, where Old Mutual had previously provided them with a deposit account. Similarly, other clients who have “personal loans” with Old Mutual worth R16bn will now be housed under the bank.
But this also hints at the opportunity: through its various arms, selling insurance, funeral policies and investment products, Old Mutual has 7.5-million customers. If it can wrangle even a third of those into the bank, it’ll have a major slice of the market.
“What has shifted with the bank significantly in the past 12 months is that we have gone from the build phase, from creating a digital standalone bank, to one that is now strategically integrated into the rest of our ecosystem,” says Strydom.
In other words, the bank has been plugged into the formidable distribution network of 7,200 brokers and 357 branches. And if it can capture a slice of the R140bn that flows through the group’s life and savings products while appealing to the 3.4-million people who are already part of its rewards programme, it’ll be on to a winner.
Positive statistics
Of course, it’s one thing to boast of 1-million customers; it’s quite another to see people using an account, transacting, borrowing and depositing. This has been the trick for the new challenger banks, like GoTyme, which says it has more than 10-million clients.
Asked about this, Strydom says about half the bank’s customers were already Old Mutual clients, including those with deposit accounts, while half are new. “For our breakeven [point] in our modelling, we’re working on a 35%–38% activity rate, and we’re just below that now,” he says.
It’s aiming for 2.5-million customers by 2028, with more than a third actively using the bank. By that date it wants to have R8bn–R10bn in deposits. And it has big ambitions to offer home loans, credit cards, secure lending and investment-backed loans.
Strydom says: “If you talk of a third of those 2.5-million customers being active users, and our customer base in South Africa being 7.5-million customers, we could become a meaningful player.”
By 2028, Old Mutual expects its “banking cluster” — the bank and the personal loans division — to turn into the black and, fingers crossed, produce up to R200m in profit that year.
As you might expect, not least because of the large amount of start-up capital required, the bank’s prospects have been a big focus for investors.
Mergence Investment Managers portfolio manager Radebe Sipamla says that despite the scepticism over Old Mutual Bank, there is “definitely scope” for it to make a splash.
“The easy win would be to convert the millions of existing insurance or funeral policy customers to bank customers,” he says. “The return on equity for South African banks suggests there is still profit for new entrants — but the jury is out about whether Old Mutual has a compelling enough proposition to make people switch.”
All Weather Capital portfolio manager Jarred Houston agrees, but says the bank’s ability to make spectacular returns won’t in itself be the standard by which it is judged. “No-one is saying this will be the next Capitec, but if the bank can serve as an engagement tool for the wider insurance business — if it can get people to use its rewards system, if it can keep clients engaged and sell them products — it will go down as a success,” he says.
In other words, the bank will be just one pillar that will prop up the rebuilt Old Mutual, allowing the company to put the years of disappointment, subpar insurance sales and brittle financial results behind it.
Houston says it’s clear the Old Mutual of today is much fitter than the profligate couch potato of the past. “Clearly, Jurie has made an impact,” he tells the FM. “He has cut costs and improved the operations. But investors remember Old Mutual for perennially disappointing and delivering no growth, so no-one is giving him the benefit of the doubt. They want to see runs on the board.”
Strydom evidently realises as much.
That’s why he focused a lot on the 12.7% return on group embedded value — a key life insurance metric that shows the improvement in its value including future profits from policies already sold — which rose sharply from 4.1% the year before.
Equally, its return on NAV was about 12.6%.
“Both of those return metrics [are] not yet in the range of, respectively, 14%–16% and 15%–17%. But it is the first time that those two return metrics have actually exceeded what we would consider to be our cost of capital, which is about 12.5%,” Strydom told analysts.
This is a critical pivot point that shareholders watch; only once returns exceed cost of capital can a company truly be said to be creating, rather than destroying, value.
And, to boost its returns further, Old Mutual has implemented a plan to slash R2.5bn in costs over the next two years. Remarkably, it is even ahead on that timetable: in the six months to June, it cut R936m in costs; its goal for the full year was R1bn.
Ranen Thakurdin, the company’s chief risk officer, who will take up the position of CFO next year, told analysts that these cost savings will reflect in the group’s profit margins over the next few months.
“What we already saw are Old Mutual Insure and Old Mutual Investments benefiting in the first half — their profits actually reflected their savings,” he said. “For that remaining savings of the R1.5bn, that will continue to drop into the profit number during the course of next year.”
Finally, Strydom announced last week that Old Mutual would also be buying back R1bn of its own shares. This makes sense, given that its share price is below its equity value per share of R20.66.
As Houston argues, it is only by consistently demonstrating these successes, rather than making promises, that Old Mutual will be able to shake off the pall over the share price.
With the stock where it is today, at about R14.05, about half the research analysts rate it as a buy. Overall, the analysts are targeting a price of R15.45 over the next 12 months — an upside of about 10%.
