While the lack in tech spending has massively impacted the IT sector in the March quarter, earnings commentaries by major US banks indicate their focus on technology investments remains intact, brokerage house ICICI Securities said in a recent report.
While YoY growth in technology expenses, as reported in March quarter earnings, for major US banks moderated, overall technology capex investments continue to be healthy, said ICICI Securities.
IT majors TCS and Infosys missed Street estimates in their March quarter earnings as clients reduced tech spending after the recent banking crisis in US and Europe and other macro concerns.
Most experts believe that the next few quarters will remain challenging for the IT industry.
"We believe that situation deterioration just started in Feb-Mar’23, which would escalate further in 1HFY24, before bottoming out. Thus, uncertainty in US and EU regions coupled with pricing pressure would lead to a challenging FY24. FY24 would see a sizable impact of the slowdown and adverse macros, which is also reflected in major revenue and margin miss. Worsening macros, lower revenue and earnings growth would lead to valuation de-rating to pre-Covid levels," said brokerage house Reliance Research.
Experts also pointed out that the management commentary from the top two IT services companies in India was marked with a sense of caution regarding the present customer sentiment across various verticals like BFSI, technology services, and certain others, particularly in the US.
Banks’ ongoing technology investment plans remain intact
As per the ICICI Securities report, Citi management mentioned in the earnings call that its overall technology expenses grew 12 percent YoY in the March quarter. The management also acknowledged that these investments have driven a significant increase in expenses, but believes they are crucial to modernise the firm and position it for success in the years to come, it noted.
The brokerage further pointed out that Citi’s ongoing technology investments include consolidation of its platforms, modernising IT infrastructure, improving data and IT security, and investing in data to create advanced decision-making and risk management capabilities. Citi is also leveraging cloud-based solutions to modernise its systems and eliminate manual processes and operating costs over time, it added.
Meanwhile, JP Morgan management mentioned a 16 percent YoY increase in its expenses in the March quarter (Q1CY23) including technology investments among other things, stated the brokerage.
Wells Fargo has also been investing in technology for improving efficiencies in its consumer banking business for the last 1.5 years. These efficiency initiatives have led to a headcount reduction by 9 percent YoY and branch reduction by 4 percent YoY in the March quarter, it noted, but there is still considerable scope for further efficiency gains as per Wells Fargo management, added ICICI Securities.
Wells is also investing in new tools and capabilities to provide better and more personalised advice to customers. It continues to enhance its mobile app. Its mobile active users were up 4 percent YoY in Q1CY23, informed the report.
PNC Financial Services (among the top-10 banks in the US), on the other hand, has set itself a goal to reduce costs by $400 million in CY23 through its continuous improvement programme, which funds a significant portion of its ongoing business and technology investments, further stated the brokerage.
US Banks’ commentaries on recession expectations
The brokerage highlighted that Citi management believes the US is likely to enter into a shallow recession later this year whereas JP Morgan CEO Jamie Dimon also believes the short-term rate curve indicates higher recessionary risk. PNC Financial Services meanwhile is expecting a recession starting in the second half of CY23, resulting in a 1 percent decline in real GDP. But despite recession expectations, their commentaries suggest they are willing to continue with their ongoing technology investments, added the brokerage.
Impact on IT
In their March quarter earnings, IT companies have called out caution among BFSI clients around tech spend, which got exacerbated post the Silicon Valley Bank and Credit Suisse crises. In the recent quarter results (Q4FY23), the brokerage pointed out that BFSI vertical growth for IT companies (Accenture, TCS, INFY) has been much lower than the company average growth rates.
"We have already factored in a slowdown in the BFSI vertical for IT in CY23 due to macro-slowdown, wherein banks’ profitability may come under pressure due to weak credit growth in the economy. Therefore, we have assumed soft revenue growth in the BFSI vertical in FY24E followed by a sharp pick-up in FY25E and FY26E because we believe the core modernisation and digitisation agendas of BFSI companies remain intact. In a recessionary scenario, there is an increased focus of clients on IT outsourcing and cost optimisation, which are the key strengths of Indian IT vendors. In such situations, market share gains accelerate for these players on account of vendor consolidation and potential buyout," it explained.
ICICI Securities continues to prefer TCS (BUY), Infosys (BUY), and LTIMindtree (BUY) in the Indian IT space.
