Hi I am Arjun Parthasarathy Speaking and this podcast is on IT Services and Banking – The Disrupted Sectors
Cisco lays off 14,000 employees as it goes more into software from its hardware centric roots. Infosys and Cognizant lowers guidance as banking and financial services cut down on IT spending.
Once global giants, banks such as Deutsche and RBS are fighting for survival. ICICI Bank, SBI and other large banks are struggling to grow amidst rising bad loans.
Disruptions are hurting two of the largest sectors in the world, the IT services sector and the banking sector and the primary cause is technology.
In the IT services sector, the move is towards use of software that can improve business performance rather than use of human capital. Hence, more and more IT service companies are looking to digitize their offerings and where new projects would mean more manpower hours earlier, in the current times it means less manpower hours. Companies too are shunning outsourcing as they are able to use software that can replicate outsourcers.
The shift towards software means that the outsourcing pie is reducing in size day by day and also that IT services firms with a huge employee base are finding that they are becoming less nimble in the fast changing marketplace.
The banking sector too is facing similar disruptions. Banks have traditionally relied upon what is called credit and information arbitrage. On the credit side, banks borrowed money at lower rates and lent at higher rates, earning a spread, which compensated for risk of default and earned a healthy return on assets. Banks also offered fee based services for corporates such as interest rate and currency derivatives.
Banks are feeling the heat from niche lenders who use technology to reach out to borrowers to provide faster loans at very competitive prices. NBFC’s and Micro Finance companies are growing rapidly at the cost of banks, as they use big data to score credit risk. NBFC’s borrow cheap from banks and lend to consumers at a healthy spread.
Banks are also saddled with regulations with over 25% of deposits going into CRR and SLR and 40% of advances going into priority sector. Regulation on LCR and capital adequacy also hurt the ability of banks to grow fast.
Banks earned hefty fees from derivatives sold to corporates as most of the derivatives were over the counter and banks had advantage of pricing the contracts. Technology has removed this pricing advantage with all corporates having access to pricing providers and also given that the 2008 financial crisis was caused by derivatives, corporates are shunning derivatives that they do not understand. The fee from the derivative business is falling dramatically for banks.
The transformation of the IT and banking sector will be fast and rapid. The sector as a whole will be severe underperformers though within the sector there will bright spots where companies with management that can adapt and grow in the disruptive environment will create shareholder value.
Avoid companies that are proving too ungainly to grow and invest in companies that are showing growth through innovation.
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