Higher interest rates in South Africa bite Discovery

Discovery has not been spared by the substantial rise in interest rates in South Africa.

In a voluntary trading statement for the year ended 30 June 2023, the group reported that its South African businesses continued to grow, but higher interest rates across its markets hamstrung profits.

Notably, Discovery Bank is seeing growth across several metrics as more quality clients join.

In the UK, VitalityLife saw a stronger performance, with profit boosted by positive operating variances, benefiting from higher inflation.

However, VitalityHealth’s profits dropped slightly off strong prior results, partly due to growing business strains and an industry-wide return of private motor insurance claims following the pandemic.

Vitality Global also saw strong growth in operating profits following a strong return on investment in Ping An Health Insurance during the second half of the financial year.

The strong growth in normalised profits from operations is anticipated to grow normalised headline earnings (NHEPS) to between 30% and 34% for the reporting year.

However, the group admitted that it was severely impacted by increasing interest rates in several markets in which it operates.

“The headline earnings impact of higher rates in the United Kingdom was more muted over the reporting year, as the hedging strategy proved effective despite significant market volatility,” the group said.

“The sizeable increase in both real and nominal interest rates in South Africa had a more pronounced impact on headline earnings over the reporting period.”

“As in prior reporting periods, the increase in interest rates creates volatility in Discovery’s headline
earnings but has no impact on the operations of the group, with little impact on the group’s liquidity,
cash flows and solvency.”

The group has stated a policy for normalising the impact of interest rate movements in the presentation of normalised headline earnings, which explains the difference between the expected headline earnings growth of between 3% and 8% and the expected 30% to 35% growth in normalised headline earnings.

However, the group expects its earnings per share to drop by between 3% and 8%.

Below are some of the group’s financial expectations:

Read: Danger ahead for South Africa’s economy