Information technology service companies see revival in BFSI segment

After years of tepid growth, the banking, financial services and insurance (BFSI) section of information technology (IT) service companies is showing signs of recovery. 

This comes on the back of higher IT spending by the investment banking and corporate finance segments, apart from the insurance sector. BFSI is almost 40 per cent of India’s IT export. With the low base effect, the expected growth this year will swell more. 

According to analysts, management commentaries from the top domestic IT firms have also indicated a rise in demand from the BSFI segment. Rajesh Gopinathan, chief executive officer at Tata Consultancy Services (TCS), had said during the March quarter earnings announcement that they were more confident about revenue in this regard from North America. “Client discussion show there is not much stress left in the system, which could  translate into better spending,” he had said.

The company had disclosed it was seeing strong growth in the digital, security and blockchain, analytics and data space segments. Reflecting the change, 

TCS announced last month that it had expanded a deal with global insurer M&G Prudential to over $1.2 billion, with a contract tenure of about 10 years.

Similarly, Wipro won a multi-year infrastructure transformation deal in the securities and capital markets domain from a global financial services firm in April. Last year, it got a five-year integrated contract worth $100 million from German insurer Munich Re.

“Outsourcing deals in the investment banking, corporate finance and insurance segments are happening as the focus in these segments remains at cost optimisation,” said Siddharth Pai, a former outsourcing advisor and founder of Siana Capital, a venture fund management company. 

P N Sudarshan, senior director at consultants Deloitte India, feels digitalisation of financial services has made the IT industry less dependent on project spending. “This segment is on an upswing but deals are now more transaction-driven than enterprise-driven.”

Growth in BFSI for domestic IT majors had slowed in recent, years with pressure on operating margin. At TCS, for example, the BFSI growth was only 1.9 per cent in 2017-18; most other divisions grew well above 6 per cent. Operating margin from the segment declined to 26.9 per cent, from 27.6 per cent a year earlier. BFSI was 39.3 per cent of TCS revenue.

Infosys, which drew 26.4 per cent of its total revenue from the financial services (FS) vertical (excluding insurance) in FY18, saw only 0.4 per cent, as against overall growth of 5.8 per cent (in constant currency). Its operating margin from the vertical also declined to 27.9 per cent, against 28.1 per cent a year earlier.

• Segments like i-banking, corporate finance, insurance drive deal flow
   
• Digital deals in BFSI vertical on an upswing
   
• Hike in interest rates in most developed economies augurs well for deals in financial services space
   
• Higher profits recorded by major US banks in Q1CY18 expected to boost IT spends 

“Last year, the market was hoping for recovery in  BFSI, which didn’t happen. But, we see that happening this year, as hikes in interest rates in most developed economies augur well for deals in financial services,” said Sanjeev Hota, assistant vice-president at brokerage Sharekhan.

Record profit numbers of American banks in the first quarter of this calendar year add to the optimism on deal flow prospects. Bank profits in the US soared 28 per cent during the first three months of the year, to $56 billion. 

This turnaround continued from last year, when six of America’s large banks — JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — made $141 billion in pretax profit.

“With most large American banks showing stable numbers, BFSI should not be a major concern for Indian firms,” said Ashutosh Sharma, vice-president at Forrester Research.