Can IT look beyond BFSI? US banking crisis threatened to create a domino

But things are getting better and demand outlook remains strong

To paraphrase an ancient aphorism, when the United States corporate sector sneezes, Indian information technology companies catch a cold. The cold turns into pneumonia if the sector sneezing is banking, financial services, and insurance (BFSI), which contributes the bulk of revenues for most top Indian IT companies.

Now picture this.
 

In March, Silicon Valley Bank (SVB) in the US became the biggest bank to fail since the financial crisis of 2008. Soon after, regulators shut down Signature Bank to control a contagion. The ripples of shock turned into waves with the UBS-Credit Suisse saga, and then JPMorgan’s acquisition of First Republic Bank.
 

BFSI contributed 31 per cent of revenue for Tata Consultancy Services in the first quarter of 2023-24, 28.1 per cent for Infosys, 33.9 per cent for Wipro and 22.6 per cent for HCL Tech.
 

IT companies continue to see weakness in discretionary spends and aggregate BFSI revenue of Tier-1 IT companies declined by 0.8 per cent quarter on quarter and 0.6 per cent year on year in the first quarter of this financial year, according to an ICICI Securities report.
 

Triggered by the fears of a banking crisis in the western economies, BFSI has been a drag in the recent quarters, making many wonder if it can be replaced by any other vertical for growth.
 

Tempting though the thought might be, it is not going to be easy. One of the biggest reasons is that banking and financial sector players have traditionally been large technology spenders. Analysts point out that the reason for sluggish growth has been the relative maturity of the players and limited budget growth.
 

On the positive side, experts point out that these IT companies are likely to benefit from large deal ramp-ups in the next 12 months.
 

“High interest rates and margin pressures have pushed BFSI firms to focus on portfolio profitability and drive drastic rationalisation efforts — vendor rationalisation, workforce rationalisation, product rationalisation, IT application and infrastructure estate rationalisation, etc,” says Aaditya Jain, vice president-BFSI tech services practice, Everest Group.
 

Therefore, BFSI firms are likely to take a cautious approach to technology spending, resulting in another quarter of softness in demand, but the structural demand outlook remains strong.

“Large IT service providers will benefit from large deal ramp-ups. Our forecasts for the next 12 months suggest that the BFSI IT services outsourcing market will grow at 3 to 4 per cent. And, we do believe that large IT service providers are better positioned to capitalise on the new demand paradigm,” says Jain.
 

Analysts at ICICI Securities point out that increased insourcing of technology talent, especially to develop new-generation capabilities by a few banks, can be negative for IT services companies in the near term. But, in the long term, an increase in outsourcing for reducing costs will prevail. However, the increase in global capability centres (GCCs) of large banks, such as JP Morgan Chase, Deutsche Bank, and Wells Fargo, is taking away a share of the business from the IT services companies.
 

A Kotak Institutional Equities report of July says: “Tech spends remain healthy for large banks and not significantly impacted for mid-size and regional banks. Weak performance by Indian IT in the banking vertical is a paradox, partly explained by likely resilient spending on insourcing and cloud or SaaS consumption.”
 

IT companies are taking a conscious strategy to ensure they get the BFSI portfolio right. For instance, Wipro is betting

on artificial intelligence (AI) and cloud computing to earn more from the BFSI sector. The Bengaluru-headquartered firm also expects its consultancy arm, Capco, to aid in its BFSI growth strategy.
 

“Over the past few years, we have made significant investments in the BFSI sector and have improved our talent, capabilities, and processes in this space — both through organic investments as well as with the addition of Capco,” Suzanne Dann, Wipro’s chief executive officer for Americas 2, told Business Standard. Americas 2 is a strategic market unit of Wipro and consists of BFSI, manufacturing, hi-tech, energy and utilities sectors.
 

Wipro acquired British consultancy Capco for $1.45 billion in 2021— its largest acquisition to date — to stren­gthen its consulting capabilities, especially in the BFSI sector.
 

“We have signed hundreds of synergy deals with Capco, significantly expanding our footprint in the consulting space,” says Dann. Within BFSI, Wipro is enhancing its focus on high-growth areas, such as insurance, and diversifying towards higher-margin accounts. “The insurance sector continues to be resilient against an uncertain macro environment. Companies in this sector are increasingly looking to apply technology to their operations — digital claims processing, or application of AI to the underwriting process, to name a few — to drive near-term efficiencies while building future-proof businesses,” says Dann.
 

TCS elevating its BFSI head, Krithi Krithivasan, to CEO shows the company’s efforts to place big bets on the sector. TCS reported a strong order book worth a total contract value of $10.2 billion for the first quarter of 2022-23, of which the BFSI total contract value stood at $3 billion.
 

In August, Infosys won a $454 million deal from Denmark-based Danske Bank to accelerate the latter’s digital transformation. More such deals are likely to come through over the next few months.

At Infosys, the financial services vertical witnessed continued softness in areas like mortgage, asset management, investment banking, cards and payments. However, large and super regional banking clients in the US have been resilient during this quarter.
 

“Large banking clients are focusing on vendor consolidation, cost takeout and self-funding transformation programmes. Many financial institutions are looking at outsourcing the non-core business that includes taking away existing employees across technology and operations,” says Nilanjan Roy, chief financial officer, Infosys. “While delayed decision-making is impacting the vertical, our recent deal wins and the strong pipeline will help create momentum and opportunity for future growth.”