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Digital banking channels are seeing a surge in usage and this is driving technology spending
Digital banking channels are seeing a surge in usage and this is driving technology spending

Steady tech spends by global lenders will aid recovery of India’s IT sector

The revenue divergence is attributed to demand fulfilment challenges (or supply constraints) in the June quarter and exposures of Indian IT to certain troubled sub-segments within the BFSI space

The fortunes of Indian IT firms are closely linked with the growth rates of the global banking, financial services and insurance (BFSI) industry. After all, the vertical generates about 30% of the total revenue of India’s leading IT companies.

For some smaller firms, such as Larsen and Toubro Infotech Ltd, Hexaware Technologies Ltd and Mphasis Ltd, an even larger portion of their revenues come from the BFSI vertical, making it crucial for their revenue growth.

In this backdrop, the latest financial results of large global banks should allay some of the concerns investors had about this important vertical.

The massive fiscal and monetary stimulus is mitigating the impact of covid-19 on US banks’ earnings. This is helping them maintain technology spends.

In fact, an analysis by Kotak Institutional Equities shows higher technology spends in the June quarter by large US banks. Digital banking channels are seeing a surge in usage and this is driving technology spending.

A similar trend was visible in Europe as well.

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“Comments from large banks indicate that this (surge in digital platforms usage) is likely to be sticky even in a post covid-19 world, driven by convenience and strength of banks’ operating platforms. This, in our view, drives the relatively stable outlook on technology spending in 2020, and we think clients are likely to accelerate repurposing of spends towards digital from legacy areas," Nomura Research said in a note.

The cost savings potential of the shift from physical to digital channels are also aiding technology spends, added the analysts of Nomura Research.

The trends are reflective in deal wins by the Indian IT sector. TCS won $2.1 billion of contracts in the BFSI space last quarter amid the pandemic, which is decent compared to $2.4 billion order wins in the segment in the March quarter. Infosys is seeing a healthy deal pipeline. Five of the 15 large deals won by the company in Q1 were from the financial services segment.

Of course, the conversion of orders into revenue will be key. “Even as aggregate tech spends at the top 8 banks grew 3% year-on-year, the aggregate dollar revenue of the top 7 IT companies from BFSI declined 4% (in the June quarter). This divergence looks sharper if only the top 5 US banks are considered for this analysis," said Motilal Oswal Financial Services Ltd analysts.

The revenue divergence is attributed to demand fulfilment challenges (or supply constraints) in the June quarter and the exposures of Indian IT to certain troubled sub-segments within the BFSI space.

Even so, the fact that large global clients themselves aren’t cutting tech spend is a relief, compared to earlier concerns about such cuts. Stocks of IT services firms have rallied and some of them are above their pre-covid highs, and much of these positives seem to be already priced in.

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