Resilient tech spend a breather for IT cos

Bengaluru Technology spending by the US banks remains resilient despite recent rating downgrade of 10 banks by Moody’s and preference for insourcing among the financial services institutions in recent time. This comes as a respite for Indian IT services companies, which draw more than 30 per cent of their revenues from the BFSI (banking, financial services, & insurance) vertical.

However, brokerage firms and management of IT firms indicated that near-term risks to growth prospects of the BFSI vertical persisted as financial institutions held back discretionary spend amid a high interest rate regime.

“Technology spend growth rate has slowed down as compared to the previous quarter for Bank of America, Goldman Sachs and Morgan Stanley. However, full-year technology spend outlook remains intact for Bank of America and JP Morgan. Moreover, increasing insourcing of technology talent, especially to develop new-gen capabilities by a few banks, can be negative for IT services companies in the near term, but on a longer term increase in outsourcing for reducing costs will prevail,” ICICI Securities wrote in a note.

Among large banks, JP Morgan has guided for seven per cent YoY (year on year) rise in its technology spend in 2023. Bank of America (BoA) has retained its technology spend outlook of $3.8 billion for calendar year 2023. For Citi Bank, technology spend during the quarter was $3 billion in second quarter (April-June) of 2023. Though technology spend growth rates for Bank of America, Goldman Sachs and Morgan Stanley moderated in the second quarter, yet it grew at a rate in line with, or better than, their respective revenue growth rates.

While technology spend among large banks in the US remain healthy, Moody’s has downgraded 10 mid-size banks’ credit rating last month, casting a shadow over their ability to spend on technology areas. These banks include M&T Bank Corp, Webster Financial Corp, BOK Financial Corp, Old National Bancorp, Pinnacle Financial Partners Inc, and Fulton Financial Corp among others.

Apart from banks, subsegments like investment banking, capital markets, mortgage and asset management continue to see moderation in spending.

“We have seen some of the volumes during the quarter coming down from clients (operating) in the industries like financial services, asset management, payment, and mortgages,” Salil Parekh, CEO of Infosys has said during the post-results press conference.

Moreover, many banks are looking at insourcing (managing the technology operations by their own team internally) in new technology areas.

Despite all the headwinds, banks in the US are looking at outsourcing large cost takeout deals to Indian service providers in order to save cost. Sources in the know said the US banks would continue to look at Indian IT firms for outsourcing large contracts at a time cost pressures are intense.

Meanwhile, European financial institutions continue to be a good source of large outsourcing contracts. Since the beginning of this year, Tata Consultancy Services, Infosys, Wipro, HCL Tech and many more Indian service providers have announced large contracts from European financial institutions.