Industry
Large US banks open purse strings for Indian IT
Summary
Indian IT services companies are benefiting from the higher discretionary spending by US banks. However, large transformational deals are yet to happen.
NEW DELHI : Around this time in 2023, the US banking sector started recovering from a crisis set off by the collapse of Silicon Valley Bank. The fear of a financial crisis had subsided. Top banks reported a surge in profits. But that didn’t reflect in the earnings of Indian information technology (IT) majors, which rely on the banking segment for most of their revenues. That’s because banks were still in a wait-and-watch mode and tight-fisted.
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Cut to a year later. US banks are well past that phase and passing on more work to Indian IT services firms. One measure of health is share prices. The Dow Jones US Bank Index is up by about 51% over the past year, compared to 26% rise in the broader Dow Jones Index. Share prices of the top five banks by market capitalization—JPMorgan Chase, Bank of America, Wells Fargo, Morgan Stanley, and Goldman Sachs—have jumped 52-68%.
The uptick in stocks continued even after the latest quarterly earnings, when all five banks, except Goldman Sachs, reported a decline in profits over the year-ago period. That was because they beat estimates by analysts, who had expected worse on account of lower interest income and higher provision for bad loans. While these pressures haven't subsided, the outlook for the sector is broadly positive. And that augurs well for Indian IT services companies.
The BFSI break
Four of the top five Indian IT services companies—Tata Consultancy Services (TCS), Infosys, Wipro, and LTIMindtree—that have announced results for the September quarter have reported increased revenues from the banking, financial services, and insurance (BFSI) sector. HCL Technologies is an exception since its wholly-owned subsidiary HCL Investments UK divested a stake in State Street earlier in 2024. If adjusted for this, HCL’s BFSI revenues, too, grew by about 4% year-on-year, ICICI Securities said in its report.
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While some customer spending is still aimed at optimizing costs, this growth has been primarily driven by higher discretionary spending. “The financial institutions in the US are looking at sustaining the growth momentum with the Federal Reserve's first trade cut in four years," TCS chief executive K. Krithivasan told analysts during an earnings call. While this trend started in the previous quarter, both TCS and Infosys said they are not seeing any large-scale transformational projects yet.
The GCC factor
This April, research and advisory firm Gartner said global spending on IT by the BFSI segment would grow 8.7% to $735.6 billion in 2024 and 9.3% a year to $1 trillion by 2028. While the IT services sector will benefit from this growth, some of the spending is also going towards setting up global capability centres (GCCs)—essentially, inhouse tech units of businesses.
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India, with its large IT talent pool, is seeing growing investments in GCCs from major banks. JPMorgan employs over 50,000 people in India, while Bank of America and American Express employ over 20,000 each, according to ANSR Research. These GCCs provide high-value services, including process automation, risk modelling and cybersecurity. While Indian IT firms have to compete with GCCs for talent, in the long run, it could prove beneficial as GCCs enlarge the talent pool. Even now, they are concentrated in traditional IT hotspots. Bengaluru, Delhi, Mumbai, and Hyderabad have three-fourths of all BFSI GCC employees.
Global competition
Banks have traditionally been big spenders on technology. For example, JPMorgan is expected to spend $17 billion on technology in 2024, on top of $15 billion in 2023. Similarly, Bank of America spends about $12 billion annually on technology. For 2024, it had set aside $3.8 billion for new technology initiatives, including artificial intelligence tools, reflecting a broader trend as businesses rush to leverage generative AI.
About 30% of total technology spend by businesses across industries goes towards IT services, according to Gartner. Indian IT services companies compete for a share of this pie. As the general thrust shifts towards AI, they find themselves competing against global players, including IBM and Accenture. Accenture reported $1 billion in generative AI bookings in the quarter ended August and $3 billion for 2023-24. As banks step up investments in transformational projects, AI capabilities will play a key role.
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