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How banking crisis in US, Europe could dent near-term IT sector demand

BFS (Banking, Financial Services) is a large vertical for software exporters

it-sector-reuters Representational image | Reuters

Software services companies derive a large part of their revenue from North America and Europe. With these economies slowing down amid a surge in inflation and central banks increasing interest rates, information technology (IT) companies were already expected to see a slowdown in 2023-24. The crisis in the banking and financial services sector in the US and Europe will only add to their woes and increase demand uncertainty, analysts reckon.

In the last few weeks, at least three US lenders - Silvergate Bank, Silicon Valley Bank and Signature Bank - collapsed. This has had an impact on other regional banks, as worried customers looked to withdraw their deposits and shift to larger, more stable banks. Shares of First Republic Bank have slumped as much as 90 per cent month-to-date. If the crisis in US regional banks was not enough, Swiss banking giant Credit Suisse had to be bailed out from going bust and is being acquired by rival UBS.

BFS (Banking, Financial Services) is a large vertical for software exporters, be it large firms like TCS, Infosys and Wipro or their smaller mid-cap rivals. According to an analysis by Kotak Institutional Equities, BFS exposure (excluding insurance) for TCS stood at 29 per cent, while that for Wipro and Infosys was at 26 per cent and 27 per cent respectively. Even others like Cognizant, HCL Tech and Tech Mahindra had a fairly large exposure to the BFS sector, ranging between 12-19 per cent.

The current crisis in the banking sector in the US and Europe will likely lead to further curtailing of discretionary technology spends in the near-term, said Kotak Institutional Equities analysts Kawaljeet Saluja and Sathishkumar S.

"BFS firms have been spending aggressively on cloud migration and tech upgrades to become cloud-first and data-driven organisations to improve customer experience, reduce inefficiencies, increase productivity and better compete with digital natives. The current predicament for the BFS sector in developed markets throws a spanner in the works," said Saluja and Sathishkumar.

Banks will be more focused on surviving the current crisis, and ensuring adequate liquidity and capital adequacy will emerge as the top priority now, and they will be more prudent on spending, they feel.

"Tech budgets outlined at the start of the calendar year can be toned down to align with increased risks faced by the sector," the analysts said.

Nomura Securities analysts Abhishek Bhandari and Krish Beriwal also feel the "recent volatility in global financial sector could increase demand uncertainty".

The analysts said that there is a likelihood of "further deterioration" in revenue growth outlook for Indian IT services companies in the financial year ending March 2024, compared with the 2022-23 fiscal. Overall, Bhandari and Beriwal remain "cautious" on the IT services sector.

While deal pipelines do remain strong, the demand outlook is likely to slow, they said.

"Companies expect clients to increase focus on cost optimisation projects over long-gestation transformational projects in the near-term, with rising macroeconomic volatility," said Bhandari and Beriwal.


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