US Banks Cutting Costs May Mean Trouble for the Indian IT Sector

Indian IT companies exposed to the US banking system are likely to be affected severely by large US banks deciding to go for spending cuts and credit loss provisioning.

Nearly 30% of all revenues in the $227 billion Indian IT industry comes from the US banking, financial services, and insurance (BFSI) sector. The danger signals have been flashing for a while, with fears of recession looming and the US Federal Government increasing rates to contain inflation and tackle the jobs crisis in that country.

A research report by Elara Capital, a brokerage house, confirms these fears. It states that the large US banks that have nearly 40% of IT spend share think of the current macro as complex, challenging, and raised ‘credit loss’ provision, reversing the prior quarter’s trend.

It added, “Despite retaining the calendar year 2022 expense outlook, in a proactive act, banks such as Wells Fargo, Goldman Sachs, and Morgan Stanley intend ‘spend cut’ to fend profit/brew operating resilience.” It also reported banks would realign their IT spending.

While Bank of America has indicated that it will self-fund tech initiatives, Citibank will focus on efficiencies from its tech investments. Similarly, Wells Fargo will look at operational efficiency and cost cuts in its 2023 calendar year budget. Goldman Sachs is seeking to up its operational efficiency and reduce non-compensation costs.

Hard times for Indian IT

Analysts indicated that all these decisions regarding IT spending would likely affect the profit margins of Indian IT companies, putting a shadow on the revenue outlook for the next financial year.

Because of the prevailing economic situation, US banks have already cut their spending and are delaying investment decisions. Analysts added that this had affected IT companies back home, and the situation will keep declining till the beginning of 2023.

The mortgage lending sub-segment is primarily known to be directly affected by rate hikes. Already, it is down 53.5% year on year as of July. The Indian IT companies with significant exposure to this particular sub-segment will face the heat immediately compared to other sub-groups. While Wipro and Infosys have extensive interests in mortgage lending, MPhasis is overexposed.