Sector Update | Technology
Sector Update | 6 August 2020
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Acceleration in technology spend at top BFSI firms
Remain buoyant, also aided by certain one-time increases in spends
Earlier edition of this note
As we anticipated in an earlier edition of this note (link), technology spending at
the top global BFSI firms indeed surprised in 2QCY20.
Growth in aggregate technology spend in the 5 key US banks – JPM, Citi, BofA,
MS, and Bancorp – accelerated to 7% YoY in Jun’20 (v/s 5% in Mar’20).
Barring Citi, spending growth trends at other 4 banks were robust (9–14%, YoY).
Compared with 1QCY20, growth (YoY decline) in technology spend accelerated
(moderated) across most of the key European BFSI firms (e.g., Credit Suisse,
UBS, and Banco Santander). Adjusted for one-offs and non-cash items, while
technology spend at DB remained stable, that at Barclays declined.
For numerous enterprises globally (including BFSI), tech spending decisions over
Mar–Jun’20 were largely reactive, rather than proactive.
In the wake of the COVID-19, firms were compelled to incur certain one-time
spends to ensure business continuity. These included the purchase of hardware,
software licenses and cloud migrations for remote work access etc.
Similarly, as global banks struggled to cope up with the herculean task of
distributing stimulus funds within a short time frame, we understand a number
of them had to make one-time investments toward reconfiguring their systems.
These spends were one-time events and are unlikely to recur going forward.
Not surprisingly, almost all of the banks hinted at a phenomenal increase in
customer engagement through digital channels, driven by lockdowns.
We postulated that this increase in digital engagement, led by a lack of choice,
should eventually result in permanent change in customer behavior.
Commentary of global banks in 2QCY20 has reinforced this argument. Even as
economies re-open and social distancing protocols are relaxed, global banks
expect digital adoption by customers to remain sticky.
Accordingly, most of them outlined plans to turn more tech-driven and efficient.
This is also viewed as a way to optimize cost related to the physical channel.
Some BFSI firms (e.g., Barclays) made an explicit reference to the fact that
digital channels are able to offer engagement with clients while simultaneously
securing superior margins (v/s branches).
Some key technology themes echoed in the earnings calls of the global banks:
(a) accelerating the shift to digital, (b) cloud migration, (c) automation, and (d)
reshaping physical and branch presence.
Over the previous 9 quarters (post the segmental reclassification by TCS and
Infosys), aggregate BFSI revenue of Top 7 IT companies (includes ACN & CTSH)
closely tracked the aggregate technology spends at the Top 8 global banks.
This correlation is understandable given that the Top 8 global BFSI firms account
for a significant share of the aggregate IT spend by the BFSI vertical. Similarly,
the Top 7 IT vendors account for the lion’s share of their outsourcing ecosystem.
However, accelerated digitalization looks like more of a secular trend
Yet to reflect in BFSI revenues of Indian IT companies
Sudheer Guntupalli – Research analyst
Research analyst: Mohit Sharma
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
6 August 2020
advised to refer through important disclosures made at the last page of the Research Report.