IT companies stare at 30 bps revenue hit from banking crisis in US

Indian IT majors such as Tata Consultancy Services and Infosys could take an up to 30 basis points hit on the revenue in the fiscal fourth quarter due to their exposure to crisis-ridden regional banks in the US, said analysts.

They added that the revenue impact will also be felt in the first quarter of the next fiscal year starting April. Experts also warned that the crisis may spill over from the banking, financial services, and insurance (BFSI) sectors to other verticals such as retail and hi-tech in the latter part of FY24.

Also read | Banking crisis: Indian IT-BPM companies may feel the heat

“A 10-30 basis point revenue impact could be felt by select Indian IT players like TCS, LTIMindtree, Infosys, and Mphasis,” said Gaurav Vasu, chief executive at IT market intelligence firm UnearthInsight.

“The impact would be felt in Q1-Q3 due to delayed decision making from BFSI clients and then it may spill over to retail and hi-tech verticals in the fourth quarter FY24. Larger banks and financial services clients will focus on cleaning up balance sheets and focus on cost take-outs, which will slow down tech spending temporarily,” he added.

Kotak Institutional Equities expects the impact from the banking crisis to play out in the form of a weak March quarter. “The current woes in the banking sector can impact sequential growth by 1-2% in 1QFY24,” it said in a note on Tuesday.

BFSI dominates enterprise tech spend and offshore outsourcing, contributing about 41% of industry revenue in this fiscal year through March, as per industry body Nasscom. North America contributes to over 50% share of revenue for the companies. Wipro has the highest revenue share from BFSI at 35%, followed by TCS (31.5%), Infosys (29.3%) and HCLTech (20%).

Kumar Rakesh, associate director at BNP Paribas, said that a large part of IT projects are not likely to see any impact as these firms handle critical business for the banking sector. "However, the impact could be visible in incremental deal signings and new project ramp-ups."

Mails sent to TCS, LTIMindtree and Infosys did not elicit a response. In a statement, Wipro said the majority of its exposure is to large banks which are well capitalized, but added that it is closely monitoring the situation in the US and Europe.

Banks’ tech budgets may be toned down

“Tech budgets and outlook on tech spending for calendar year 2023 were reasonable for most large US banks. However, the current predicament for the BFSI sector in developed markets throws a spanner in the works,” Kotak said.

The brokerage added that surviving the current crisis and ensuring adequate liquidity and capital adequacy will emerge as the top focus for customers, leading to prudence on spending.

Tech budgets outlined at the start of the calendar year can be toned down to align with increased risks faced by the sector, Kotak added.

Experts said large banks are not showing signs of stress yet, unlike during the global financial crisis of 2008.

Outsourcing advisor Pareekh Jain said that unlike the 4-5% impact to revenue of IT majors seen during the 2008 crisis, the companies are better placed to tide over with less than 1% revenue impact.

“There could be some impact to spending across the European BFSI segment as well due to the Credit Suisse merger. Some digital transformation related spending in this region could be hurt,” said Jain.

New deal ramp-up related spending will be hurt, Jain said. “However, there is scope for additional vendor consolidation deals in the medium term arising from the merger.”

TCS and Infosys are better positioned among Tier 1 IT companies to tide over this situation, analysts said.