Big US banks’ cost-cutting plans could hit Indian IT

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Indications of spending cuts and increased credit loss provisioning by major US-based lenders and financial institutions could have a ripple effect on Indian IT companies which are already wary of a possible recession in the US. United States, analysts said.

Banking, Financial Services and Insurance (BFSI) customers account for nearly 30% of India’s $227 billion global IT revenue (in FY22), forming its larger vertical. Indian software services exporters exposed to mortgage lending could also take an immediate hit, analysts added.

“Major U.S. banks – with nearly 40% of (total) IT spend share – found the current macro to be complex, difficult and increased the provision for ‘credit losses,’ reversing the trend of previous quarters” , brokerage Elara Capital said in a research report. . “Despite maintaining the calendar year 2022 spending outlook, in a proactive move, banks such as Wells Fargo, Goldman Sachs and Morgan Stanley intend to ‘cut spending’ to pare earnings/brew resilience operational,” he added.

The report also highlighted recent comments from the management of major US banks.

Bank of America has emphasized self-funding technology initiatives, while Citibank has sought to depend on the effectiveness of technology investments to implement a strategic agenda.

Focus on cost optimization

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Similarly, Wells Fargo’s budget for calendar year 2023 could focus on operational efficiency and cost reductions, while Goldman Sachs seeks to improve operational efficiency, including reducing non-compensation expenses.

The focus on cost optimization and shifted focus on technology spending at these U.S. banks is set to hit India IT with a lag, spoiling the 2023-24 growth outlook, analysts Ruchi Mukhija, Vaibhav said. Chechani and Seema Nayak in the research note.

“There is already some weakening in spending and investment decisions being delayed amid all the current economic uncertainty,” Phil Fersht, founder and chief analyst of the market research firm, told ET. HFS computing. “This is having a ripple effect on the Indian IT services market and is expected to worsen through early 2023.”

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

Mortgage

Within the BFSI business, the mortgage lending sub-segment exhibits a strong negative correlation with interest rate cycles and is therefore the hardest hit sub-segment. After the US Federal Reserve’s quantitative tightening this year, overall US mortgage volumes fell 53.5% year-on-year in July.

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

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

Wipro and Infosys have higher exposure to mortgage services in the Tier I company list, according to Elara Capital’s sensitivity analysis and valuation.

Mphasis at level II has an outsized presence in this segment.

The companies did not respond to emails from ET seeking comment.

“As in 2008-09 (global financial crisis), the decline in mortgage volumes has 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 in the medium term,” said Fersht of HFS.

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