The BFS segment will see flat to negative growth through most of 2023, said Phil Fersht, chief executive at IT research firm HfS.
“Some banks are shrinking spending due to the huge slowdown in the mortgage sector and the escalating recession in Europe is starting to bite in IT services,” Fersht added.
He said tech spending overall would increase 11% next year, but actual growth will be negligible on account of inflationary pressures.
Banking, financial services and insurance (BFSI) clients account for nearly 30% of Indian IT’s $227 billion (about Rs 18.8 lakh crore) overall revenue (in FY22), forming its largest vertical.
The IT industry provides digital transformation, core-banking products, and customer experience services to banks, as well as mortgage software services including loan origination.
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In each of the quarters in calendar year 2022, the top four Indian IT firms –Tata Consultancy Services (TCS), Infosys, HCLTech and Wipro – reported at least a 10% on-year BFSI revenue growth in constant currency terms.
Numbers for the December-ended quarter will be announced next month, usually from the second week of January.
Brokerage Kotak Institutional Equities said in a research note that the fiscal year ending 2024 is likely to be a “bland year” for BFS tech spends and growth will moderate for IT services companies.
“Performance among companies will not be democratic but will diverge sharply depending on a multitude of factors such as exposure to clients cutting spends, vendor consolidation decisions and insourcing by key clients,” the brokerage said in a report published earlier this month.
Insourcing up
Analysts said insourcing, or banking firms setting their own inhouse capability centres in emerging markets, has increased, and that was another reason why external IT spending by companies could be hurt.
BFS firms continue to ramp up their own workforce in technology, with some shifting from contractors to in-house teams, Kotak said.
“Citi indicated a shift from consulting to its own workforce in its technology transformation effort over time. KeyBank indicated that it is insourcing away from some contractors in technology due to elevated attrition among its workforce,” the brokerage said. “State Street continues to insource some strategic technology functions from vendors and is increasing its headcount in Poland and India centres.”
Analysts also said that some of the growth moderation could be due to comparison with Covid-19 related highs. Therefore, BFS spends still look robust on a normalized basis.
“When banks turn to third-party providers, they still can’t get experienced engineering resources in the quantities that they need, hence they are turning to their GIC (global inhouse centres) or captives, to meet this need,” said Peter Bendor-Samuel, CEO at IT research firm Everest Group. “…However, we do not see this significantly affecting demand from third-party providers.”
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