Exterior view of the new global headquarters of Discovery in Sandton. Photo: Supplied
JOHANNESBURG - Financial services group Discovery plans to spend a total of R1.5billion in the build-up to the launch of its much-anticipated bank, set to start operating later this year.

The group said it had already spent R1.2bn following the granting of its banking licence by the registrar of banks and the South African Reserve Bank last October.

It said the Discovery Bank would test its capabilities with live testing of system infrastructure, operating processes and regulatory engagement.

“As previously announced, the licence is subject to certain conditions imposed by the registrar relating to the shareholding in Discovery Bank. Shareholders of the bank are currently in discussions to agree how best to manage these conditions,” Discovery said.

Presenting the results for the six months to December, Discovery said the purchase of the Discovery-branded but FirstRand Bank-issued credit card business and book remained subject to Competition Commission approval.

Discovery reported a 19percent increase in normalised operating profit to R4.06bn, while normalised headline earnings increased by 30percent to R2.83bn.

“I think these were a solid set of results and the share price confirmed this by trading higher after their release,” said Ron Klipin, a senior analyst at Cratos Capital.

Ready to go

Klipin said that Discovery Bank’s core operations were already functional and ready to go, and likely to operate on a digital format only.

“This means it is likely to be branch-less, resulting in a lower-cost business operation compared to the more traditional banking model,” Klipin said. He said Discovery had invested around R2bn in two years to get the project off the ground.

“The market is right for a low-cost digital banking model as evidenced by two other potential players. The target market is likely to be the higher LSM clients, where Discovery is already providing them with a range of products. Therefore, it has an established customer base, and could entice wealthy customers away from existing providers,” Klipin said.

“Bank shares have rallied since President Cyril Ramaphosa delivered the State of the Nation Address last week and this could be an exciting time for the bank to enter the space.

“Timing in terms of being a disruptive force in the market is more important than the prevailing economic and political challenges facing South Africa. The market will vote with its wallet,” Klipin said.

Nesan Nair, a senior portfolio manager at Sasfin Securities, said niche operators, such as Discovery, had lots of opportunities to use technology as a resource to better identify client needs and develop product accordingly. He said Discovery would be perched for the upper end of the market.

“These opportunities are for example branch-less app-based transactional banking at lower costs and faster, more secure processing using blockchain technology as opposed to the traditional back-end technology that is a lot more expensive,” Nair said.

Discovery shares rose 3.13percent on the JSE yesterday to close at R182.07.