Banking, financial services and insurance (BFSI) spending globally is projected to grow just 3% in 2023 compared with 10% in 2022, which can lead to further pressure on the IT services sector, said analysts.

The Indian IT industry earns around 40% of its revenue from BFSI solutions and is already facing a slowdown in deal closure cycles amid macroeconomic concerns that are hurting the global banking sector.

The slowdown in BFSI spending will further slow enterprise spending and related deal closures for services firms, said HfS Research chief executive Phil Fersht. “This will persist for at least a quarter with the potential for stabilisation and turnaround when chances of banks failing as well as interest rate hikes quiet down, possibly in Q3 or Q4 2023,” said Fersht.

Within BFSI, core banking modernisation and data migration to the cloud are two likely areas that still need investments, he said. “As banks consider their paths forward in the low-confidence economy, there is a clear need and growth potential in commercial banking that can be unlocked with appropriate investment.”

In a report published last week, brokerage Motilal Oswal said discussions with technology companies indicated continued pressure on near-term tech spending at large enterprises, along with cost-saving mandates for their technology teams, especially in the BFSI and retail/consumer sectors. Within the Indian IT services sector, companies like Mphasis (62%) and Coforge (53%) have the maximum exposure to the sector, said the report.

Kotak Institutional Equities said earlier this week that financial services would continue to see weak demand, adding to the delays in client decision-making across the IT services sector. “We believe that the demand environment is especially weak in the financial services and technology segments. A prolonged recovery in clients’ willingness to spend would imply downside risks to FY2024 revenue growth estimates,” it said in a report.

New Demand

IT service companies expect the banking crisis in North America and Europe to create larger opportunities for IT demand in governance and risk compliance.

However, Everest Group CEO Peter Bendor-Samuel suggests that with the Big Four consultancies already cornering a majority share of this market, the IT companies will be left with a small share of the new opportunities in the financial services sector. BFSI comprises around 40% of the Indian IT service sector revenue.

“The Big Four accounting firms are far better positioned and likely to take the lion’s share of this fast-growing market. The market could be quite large and grow to be worth over a billion,” said Bendor-Samuel.

The Big Four of Deloitte, PricewaterhouseCoopers, EY and KPMG have been increasing their pool of technology resources focused on banking solutions over the past few years, a large chunk of which is based out of India.

Tata Consultancy Services, India’s largest software services firm, sees several opportunities arising from the banking crisis.

The shift of customers to large banks — considered to be more stable — is creating a new set of business opportunities for the company as these banks “are primarily our clients”, CEO K Krithivasan had told ET after Q4 results.

TCS generates more than 30% of its revenue from the BFSI sector and another 10% from banking-related products and platform offerings.

HCLTech CEO C Vijayakumar told ET after the company announced its Q4 results that the strict regulations seen across large banks would be increasingly mandated for smaller banks as well. “Now smaller banks will have to invest a lot in technology, management, compliance and things like that. So that’s a potential opportunity for us,” he said.

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