Global recession now visible as US banks turn cost conscious

- BFSI vertical contributes over 30% of revenue

- US banks cutting headcount, bonuses

- Cut in technology spend by banks is the lead indicator of slowdown

- List includes Goldman Sachs, Morgan Stanley, Wells Fargo

Bengaluru: Slowdown in the IT services sector is likely to deepen in the coming months with BFSI (banking, financial services & insurance) vertical giving the first instances of spending cuts.

According to industry veterans, the first glimpses of slowdown is already visible as leading banks in the US shed staffers, cut bonuses and provide gloomy economic outlook.

"Global banks are the lead indicators of any slowdown. Recently, many banks have reduced bonuses and gave warning of economic slowdown. It means the economy is not doing good. So, as the slowdown hits, it will affect all players in the IT industry. Probably, we will see its clear reflection during the second quarter of 2023," V Balakrishnan, chairman, Exfinity Ventures & former CFO of Infosys, told Bizz Buzz.

Premier banks on Wall Street- JPMorgan, Bank of America and Citi- are planning to cut bonus pools as much as 30 per cent as the economy tightens. US lender Morgan Stanley has announced job cuts, shedding two per cent, or around 1,600, of its workforce. Employees at Goldman Sachs, and Wells Fargo have also seen job cuts in recent months.

In the BFSI vertical, mortgage lending and investment banking are likely to be hit the hardest in coming months as economic activity slides. With rising interest rates in the US, mortgage segment of Indian IT players has already shown weakness. Not only in the US, European banks like Credit Suisse have also seen reducing their technology spends in recent months.

Most IT services companies draw more than 30 per cent of their revenues from the BFSI vertical, which is considered critical for sustaining revenue growth. With banking vertical sliding, it will be difficult for domestic IT firms to sustain double-digit revenue growth of last year.

Budgets for technology spend usually get finalised during December-January of every year by global enterprises. According to sources in the know, deal renewal discussions are currently going on and management of Indian IT firms will provide a clear view of those discussions during the third quarter results announcement starting next week.

"Clients finalise their budgets this time. Customers will start discussions about any budget cuts this time around. We will have a better view in coming months," said Balakrishnan adding that any slowdown will give rise to more cost takeout deals, but margins will be under pressure.

"Cost takeout deals will come to the market. But these deals are margin dilutive in the initial phase. So, margins will continue to be under pressure," he said.

Global banks are the lead indicators of any slowdown. Recently, many banks have reduced bonuses and gave warning of economic slowdown. It means the economy is not doing good. So, as the slowdown hits, it will affect all players in the IT industry. Probably, we will see its clear reflection during the second quarter of 2023

-- V Balakrishnan, chairman, Exfinity Ventures & former CFO of Infosys