No signs of IT spend recovery at US banks

Bengaluru: Elevated interest rates, cost pressure and rising insourcing delay recovery in the IT spend by American financial services institutions, from which Indian IT firms draw substantial amount of revenues.

Brokerage firms and management of Indian IT firms have indicated that spend is unlikely to come back unless the US Federal Reserve reduces interest rates for consecutive times in 2024.

Growth slowdown in American banks has aggravated the problem, delaying the recovery in the BFSI (Banking, Financial Services & Insurance) vertical of IT services companies.

Data compiled by Antique Stock Broking shows that six large US banks’ average technology spending growth came down to 5.7 per cent in Q4 of 2023 (October-December period) as compared to 6.4 per cent seen in the previous quarter. Overall, these banks had reported 1.8 per cent year-on-year growth in December quarter as compared to nine per cent posted in the previous quarter.

Such deceleration in growth has led to rising cost pressure among American banks, leading to job losses.

Last year, global banks eliminated more than 60,000 jobs, marking it one of the worst years post the pandemic. Both the US and European banks cut headcount in their bids to save cost amid falling fees income and drying up public listing. Such reduction in headcount has not come to a halt this year as global banks like Citigroup & Deutsche Bank have announced their plans to cut staff further.

In January, Citigroup announced plans to eliminate 20,000 positions from its global workforce of around 200,000. Similarly, Deutsche Bank revealed plans to cut 3,500 jobs as part of a programme to reduce costs by $2.7 billion by 2025.

Against this backdrop, global and Indian IT firms, which draw around 30 per cent of their revenues from BFSI vertical, are in a wait and watch mode. Most are pinning their hopes on planned interest rate cuts by the US Federal Reserve this year.

“Financial services sector is burdened with high interest rates. And because of the highinterest rate, there is a wait-and-watch and kind of a pause on discretionary work (in this sector). Normally, what I have seen based on the experience is, if there are one or tworepeatable cycles of interest rate adjustments downwards, we will start to see the spend tocome back,” Ravi Kumar, CEO of Cognizant said at the post results analyst call.

Meanwhile, rising insourcing by global banks has raised concerns among the volume of work that will come to IT firms in the future. As part of the insourcing, most banks are doing more technology work from their captive centres than outsourcing it to IT vendors.

“Indian IT firms are yet to ascertain the impact of AI on banking operations. That is the reason they have started offering Generative AI solutions to US and European banks with whom they have several decades of engagement. Apart from growth slowdown and insourcing, AI adoption by global banks is another determining factor in deciding the extent of outsourcing,” said an IT analyst.