Connect with us

Headlines of the Day

Altered tech spend of US banks expected to hit India IT, Elara Capital

Indications of spending cuts and increased credit loss provisioning by large US-based lenders and financial institutions may have a spill over effect on Indian IT companies already wary of a possible US recession, analysts said.

Banking, financial services and insurance (BFSI) clients account for nearly 30% of Indian IT’s $227 billion overall revenue (in FY22), forming its largest vertical. Indian software services exporters that have exposure to mortgage lending may also witness an immediate impact, analysts added.

“The large US banks – with nearly 40% of (total) IT spend share – opined the current macro as complex, tough and raised ‘credit loss’ provision, reversing prior quarters’ trend,” brokerage house Elara Capital said in a research report. “Despite retaining calendar year 2022 expense outlook, in a proactive act, banks such as Wells Fargo, Goldman Sachs and Morgan Stanley intend a ‘spend cut’ to fend profit/brew operating resilience,” it added.

The report also highlighted the recent management commentary of large US banks.

Bank of America has emphasized on self-funded tech initiatives, while Citibank sought to depend on efficiency from tech investments to deliver a strategic agenda.

Focus on Cost Optimisation
Similarly, Wells Fargo’s calendar year 2023 budget may focus on operational efficiency and cost cuts, while Goldman Sachs is seeking to improve operational efficiency, including cuts in non-compensation expenses.

The focus on cost optimisation and altered priority with respect to tech spending at these US banks are expected to hit India IT with a lag, marring the 2023-24 growth outlook, said analysts Ruchi Mukhija, Vaibhav Chechani and Seema Nayak in the research note.

Indian IT companies provide digital transformation, core-banking products, and customer experience services to banks, as well as mortgage software services including loan origination.

Mortgage Lending
Within the BFSI business, the mortgage lending sub-segment has strong negative correlation with interest rate cycles and is, thus, the hardest hit sub-segment. After the US Federal Reserve’s quantitative tightening this year, overall mortgage volumes in the United States are down by 53.5% on year as of July.

This is expected to have an immediate corresponding impact on India IT companies who cater to this specific segment versus a delayed impact from other sub-segments, analysts said.

All Tier I tech players offer mortgage lending services through their products or platforms.

Wipro and Infosys have a higher exposure to mortgage lending services in the tier I companies list, as per Elara Capital’s sensitivity analysis and assessment.

Mphasis in tier II has an outsized presence in this segment.

“Like in 2008-09 (global financial crisis), the decreasing mortgage volumes have an immediate impact for Indian service providers in the space. However, the negative impact will be slower and less pronounced, but volumes will be down for the medium term,” Fersht of HFS said. EassyWay

Click to comment

You must be logged in to post a comment Login

Leave a Reply

Copyright © 2022 Communications Today

error: Content is protected !!