South Africa: Discovery Bank's Long Road to Profits and Returns Worries Investment Community

analysis

Discovery has spent R3.2bn (cash from existing resources) in building its new branchless and app-only bank called Discovery Bank. A positive return on capital invested in Discovery Bank is expected between four and eight years after the bank has been in operation. More money will also be invested by Discovery in the bank to grow it.

Discovery's plan to build a branchless and app-only bank in South Africa continues apace, but the actual rollout to the market is slower than expected.

Discovery's significant investments in new businesses such as the much-anticipated bank - Discovery Bank - along with Discovery Insure and Vitality Group is starting to bite profits of the financial services group.

At the results presentation on Wednesday 4 September, Discovery CEO Adrian Gore revealed that the company spent R1.3-billion on new businesses (including Discovery Bank) in the year to June 2019, which is one of the reasons headline earnings per share - a key profit measure that excludes certain one-off items - fell by 12% to R7.89.

Discovery is increasingly taking flak from investors for the significant money spent on new innovations at the expense of higher profits and dividend payments (final dividend for the reporting period remained...

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