Discovery says 60% of its bank clients have ‘mispriced’ home loans

Discovery will launch its home loan offering in April (it ‘hopes’), and believes it has a “very compelling product”, according to Discovery Group CEO Adrian Gore.

It says the overall opportunity is the R1.4 trillion mortgage market in the country. Of this, Gore says there is an “embedded client base within Discovery Bank [that] has R280 billion of home loans”. 

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Read: Discovery Bank aims at FNB with home loan launch and Checkers partnership

This means Discovery has access to up to (as much as) 20% of the entire mortgage market in SA from its existing client base, which has home loans at (likely) the big four banks.

This is a “significant opportunity”, and it will launch its home loan, which will be administered and underwritten by SA Home Loans, imminently.

Gore says “over the last year, the home loan product was built, was being alpha tested”, and “will be rolled out – we hope – in the next four weeks”. 

Mispricing an ‘opportunity to create value’

Its home loan proposition, like its banking, is premised on “shared value”, says Gore, which means “if you manage your money, if you’re using our products, we bring your interest rate down”. 

It believes that due to this mispricing, there is an “opportunity to create value”.

Overall, Discovery believes that 60% of its existing bank clients will get an interest rate reduction on their home loan. On its official new home loans website, it says customers can pay up to “1% less”. In its results presentation, it suggests there are more savings to be had. 

Source: Discovery results presentation

It has designed a slick onboarding process where clients can apply for new home loans, or switch or refinance. They can have up to three co-applicants (spouses, and so on), and the maximum finance period is 30 years. 

Gore maintains the “market potential for us is dramatic”.

“We have the ability, we think, to penetrate into that space that is with us already.”

Overall, it has been very careful in the quality of clients it has granted credit to. Gore used the word ‘judicious’ repeatedly during last week’s presentation. 

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He highlighted that Discovery Bank was built on the back of Discovery Card and “started out with unsecured lending through the credit card”. 

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Overall, Discovery has gone through the cycle of investment, according to Gore. “There are now four platforms for growth: the Vitality chassis, Vitality global, Vitality network, the bank.”

“I believe what you will see is adding to the group 5 to 10 percentage points of higher growth.”

Bank breaking even

Discovery Bank has broken even operationally, according to the group. 

Net interest income and non-interest revenue continue to grow. Gore says “expenses are critical because this is a digital bank so, to an extent, the expenses don’t grow “. Its customer acquisition costs are “flat or very controllable,” according to Gore. This leads to a geared effect.

If operating income is growing at 60% (compounded), expenses are flat, and acquisition costs are up or down 5%, it’s clear how the picture looks. 

Read: Discovery resumes paying interim dividends

Hylton Kallner, CEO of Discovery Bank, says it has “largely built the home loan capability within the existing expense base and platform”. 

“We don’t expect any material change in the expense base as we start to roll out home loans and other lending as we move forward. It all plays off the same platform.”

Vehicle finance to come? Surely. 

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William Murphy

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