Slow revenue growth of top four US banks likely to affect Indian IT firms

With the top four US banks — Citi, Bank of America, JPMorgan Chase and Goldman Sachs — losing steam in revenue growth, Indian IT players are likely to face the heat in the key banking, financial services and insurance (BFSI) vertical.

Factors such as the trade war between the US and China, and the fear of global slowdown, are making banks defer their tech spending — a decision that has already started adversely impacting top line growth from this vertical, said industry experts.

“We see cyclical headwinds from a temporary pause in tech spending from banks as they grapple with trade tensions and overall macro uncertainties,” wrote Yogesh Aggarwal, head (research) of HSBC Global Research, in a report.

“Revenue growth of US banks, which are the top clients of TCS and Infosys, has started to soften, and this doesn’t bode well for near-term spending outlook.”

According to the HSBC report, top line growth of the top four US banks fell to around 2 per cent in the second quarter ended June this year, as compared to around 5 per cent in the previous year.

Similarly, the IT spending intensity has dipped by 50 basis points to about 6 per cent in the June quarter.

“Demand slowdown in the near term is evident from the Q1 commentaries of IT companies as well as from the US banking results,” wrote Aggarwal of HSBC.

Most Indian IT majors have also flagged concerns over lower spending by US-based banks, especially in the capital markets segments, during the first quarterly earnings call.

“Large banks are cautious about spending in the near term on account of macro uncertainty. We see some stress in the capital markets segment, as well as among European banks,” said Rajesh Gopinathan, CEO and MD of TCS.

In Q1FY20, the BFSI vertical grew 9.2 per cent (YoY) as compared to 11.6 per cent reported in the preceding quarter. Similarly, Infosys — which reported a 9.5 per cent rise in the financial services vertical — also said that spending in the capital markets segment remained low.

Softness in the capital markets segment is already reflected in numbers, as trading revenue of the top four US banks fell 8 per cent in the second quarter, which slumped 14 per cent in the first quarter.

Loss from trading desks are also prompting financial institutions to lay off employees, as seen recently in case of Deutsche Bank and amid reports of such planned reduction by Citigroup.

Apart from deferment of spending decisions, the rising pace of insourcing by banks, too, is reducing the overall outsourcing pie.

“Banks want to keep the technology stack with themselves as it is core to their operations. This is, in a way, reducing the overall share of outsourcing,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.

He said that while core application and development functions will continue to be outsourced by banks, discretionary spends related to digital services are likely to be delayed.