Tag: banking

How the UBS Takeover of Credit Suisse Will Impact the BFS IT Services Market | Blog

UBS’ takeover of longtime rival Credit Suisse in a rushed, deeply discounted deal has reverberations across the banking and financial services (BFS) IT services market and on service providers. Read on to learn the looming risks and what to pay attention to in this blog.    

The rescue by UBS of Credit Suisse marks the latest explosion across global financial markets in the ongoing banking troubles sparked by the collapse of Silicon Valley Bank and Signature Bank in the US, as we covered in our last blog.

Let’s take a look at the factors leading up to the Swiss brokered last-minute emergency takeover of Credit Suisse at a 60% discount.

Credit Suisse was already battling concerns when its biggest annual loss since 2008 exacerbated the situation. Falling investor confidence eroded its share price to an all-time low, and top investors refused to give the bank more money citing liquidity concerns and regulatory hurdles.

Because Credit Suisse is considered one of the global systemically important financial institutions (SIFI), concerns about its future existence were particularly troubling. While the deal was made to prevent further meltdowns and stabilize the banking industry, risks of further blight spreading exist.

Impact of the UBS-CS transaction

The merger of the two giants will have ripple effects on the BFS market, including:

  • Slowed growth in Europe: If the crisis trickles down to other banks and lasts long, revenue growth in the banking, financial service, and insurance (BFSI) segments will be impacted in the near to mid-term. Other related sectors (such as retail and telecom) also can be affected as seen during the Great Financial Crisis of 2008
  • Hits to other business segments: Areas such as asset and wealth management will be impacted by UBS’ decision to exit its wealth management business in some markets. Also, the move to wipe out the holdings of Credit Suisse bondholders has damaged Switzerland’s global reputation as a stable, predictable international asset manager
  • IT consolidation: With duplicating technology platforms and applications, the new entity will have to rationalize vendor portfolios and IT estates to realize significant cost synergies. Merging the two banks will require increased short-term spending on integration activities and consulting. Partners that can create modernization roadmaps for the combined entity also will be needed to drive long-term value
  • Job loss: UBS’s rescue plan for Credit Suisse may result in the loss of thousands of jobs at a time when the Swiss financial sector is already under tremendous stress due to the sudden takeover. The bank has slashed 4,000 positions so far this year
  • Robust risk controls: Credit Suisse’s risk management practices will need a major revamp given its troubled history of scandals and management controversies (Archegos and Greensill scandals in 2021) that led the Swiss Financial Market Supervisory Authority (FINMA) to order remedial action. The required measures include periodic executive board-level reviews of the most important business relationships for counterparty risks

Additionally, suppliers in UBS and Credit Suisse’s IT portfolio should brace for an impact when these mammoths consolidate.

UBS-CS impact on service providers

Traditionally, UBS and Credit Suisse have been huge outsourcing shops, with two or three major service providers controlling most of the work. Both banks have actively been reducing their outsourcing headcount and shifting their focus to insourcing and building capabilities in-house over recent years. This direction, coupled with the dynamics of the takeover, will lead to a rebalancing in the overall service provider portfolio across both banks. Here’s a look at the current landscape:

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Typically in mergers, providers that have big contracts with both entities stand to lose revenue because the spending by the merged entity will not be as large as it was under the separate relationships, unless they gain wallet share from competitors.

Suppliers that only provide services to Credit Suisse are at risk of having their portfolio consolidated and moved to UBS. However, providers who bring intellectual property or a niche capability to the table may be able to maintain the business through the consolidation.

We are closely watching how the events will unfold in the next few weeks. UBS has a stronger balance sheet and is insured against any losses by the Swiss Treasury, which should lead to stability but settling cultural, and IT alignment will take time.

How Credit Suisse’s wealth management business shapes up is another element to consider. Already clients and asset outflows have begun, with competitors trying to take a piece of this pie.

BFS market outlook

The road ahead will be marred by the following challenges:

  • Banking industry consolidation: While the sudden implosion of SVB delivered a deep blow to a mid-market sector, the Credit Suisse collapse may have further repercussions across continental Europe and lead to further industry consolidation and mergers. This also will impact the technology sector, which is already reeling from layoffs, falling stock prices, and diminishing funding for startups
  • Business segments and markets reprioritization: Providers will need to reprioritize their efforts and pivot their go-to-market focus on high-growth segments. A critical need exists to align with growth segments across lines of business, marquee clients, and the partner ecosystem
  • Margin resilience: Our initial hypothesis indicates that service provider contract pricing should remain stable. However, revenue realizations could come under pressure with a lag due to portfolio shifts and the heightened competitive intensity. The US dollar has strengthened in past cycles in relation to the Indian Rupee so the cross-currency impact should be positive for margins

For more insights on the BFS technology and IT services market or to discuss the UBS-CS deal, please reach out to Ronak Doshi, Kriti Gupta, or Pranati Dave.

SVB Crisis: IT Industry May See Fewer BFSI Deals | In the News

The Indian IT industry, which has been facing macroeconomic challenges, might witness a further slowdown in BFSI (Banking, Financial Services, and Insurance) deals due to the recent collapse of Silicon Valley Bank (SVB).

Peter Bendor- Samuel, CEO of Everest Group, told TNIE that the direct impact of the SVB crisis on the Indian IT industry will be modest but the indirect could be more significant. In case of direct impact, this is going to have a negative effect on the high-tech customers, particularly the smaller start-ups.

Read more in The New Indian Express

SVB Aftermath: How Will the Bank Failures Impact the Technology Services Industry? | Blog

With the recent banking implosion, the global financial services industry, technology companies, and service providers will be hit in different ways. Let’s explore the reverberations of these concerning banking trends.

The failure of Silicon Valley Bank (SVB) along with Silvergate and Signature Bank raises the question: Are these isolated incidents or signs of greater trouble in the financial services industry signaling a recession in the US? We believe this will start a domino effect impacting banking regulations, profitability, and technology spend.

The recent collapse of the banks will have repercussions across the financial services system and may trigger the following aftermaths:

  • Opportunities for large banks to capture business from banks with similar concentration sector risks of sectors that are seeing slowdowns (e.g., the start-up and tech concentration for SVB)
  • Rising mergers and acquisitions (M&As) to counter concentration risks and take advantage of current banking valuations, especially in the mid-market and regional banking segments
  • Reversing rate hikes by the Federal Reserve could bring about a multi-fold impact, as most organizations have planned their business strategy with the assumption of additional hikes for rates in 2023
  • Tightening of spend across organizations to manage near-term profitability. This could also cause spending slowdowns this quarter for IT outsourcing suppliers. Discretionary spending also will dry up, and decisions on new large modernization deals will be delayed
  • Declining revenues and loss of business in the current and following quarters for IT outsourcing suppliers catering to these banks

After the dust settles, these bank collapses can bring about the following two key learnings in the long term:

  1. Data and analytics and Artificial Intelligence (AI) technologies could play a key role in better risk management (e.g., for the SVB asset-liability mismatch issue) to predict similar risk scenarios and prevent future failures
  2. Additional stress test scenarios can help avoid future bank runs on non-SIFI institutions

Banking trends and impact

As the events played out, Moody’s downgraded its view on the US banking system from stable to negative, citing a rapidly deteriorating operating environment. Banks with sector-specific concentration risks, specializing in two or three sectors, have grown deposits in the last couple of years and also have a higher percentage of customers with average deposits exceeding the FDIC-insured limit, putting them at higher risk.

These banks will need to assess their portfolios and provide assurance to their customers. Even with these guarantees, customers still may decide to change their banking partners and seek traditional large banks that have more liquidity, impacting regional and smaller banks’ growth.

Declining customers and subsequent deposits will also affect other banking portfolios, and digital and technology transformation spend may take a hit. Banks’ risk management functions also will be scrutinized again. For example, only one of the seven members of SVB’s Risk Committee had risk management experience.

Implications for the financial services industry

The global financial services industry also could be impacted. Other geographies like Japan and the UK are showing signs of distress with banks of similar portfolios and exposures.

The bank failures could have a lasting impact on the sector as the financial services industry restructures and implements new processes to avoid similar scenarios, including:

  • Stricter stress testing rules to prevent further risk to the nation’s financial stability
  • Increased frequency and number of stress testing within banks as they reassess their portfolios and plan for any asset-liability mismatches
  • Greater focus on banking governance in the US triggered by the questions raised over systemic risk exemptions for SVB and Signature
  • Layoffs and hiring freezes as the industry becomes more prudent and conservative
  • Larger banks taking business from banks that have similar risk issues and might struggle
  • Rising M&As, especially in the mid-market and regional banking segments

Opportunities for providers

Here are our recommendations on how technology and service providers can capitalize on these new banking trends:

  • Adopt a multi-stakeholder approach with large banks: More than half of the business and financial services (BFS) technology spend comes from Tier 1 banks, and we expect investments by these market giants to remain strong and even expand to address the ripple effects. Providers should adopt a multi-stakeholder approach to target risk and compliance, marketing, operations, technology, and business unit leaders who all might course correct their strategies (in response to potential Federal Reserve reverse rate hikes, products being stress tested, new ones being launched, increased regulatory reporting activity, etc.)
  • Prioritize accounts for small and mid-size banks and credit unions: Service providers need to re-prioritize their account strategy for these banks as they renew priorities and focus areas. We expect overall spending by small- and mid-size banks to decline, making it critical for providers to identify and pursue the right accounts with the most relevant messages (based on the level of financial health)
  • Reenergize pre-COVID cost-takeout playbooks with next-gen elements: As banks come under immense margin pressure, some asset takeovers and carve-out opportunities may arise. A solutions mindset will resonate more soundly with clients than a pure talent-led play. Providers should plug gaps by working with technology partners and/or bring in-house technology assets.

We expect an increase in offshoring intensity and a push for captive setup conversations through a build-operate-transfer (BOT) model approach. Service providers should watch the direction of US dollar prices as commercials will need to be revised for the foreign exchange (FX) impact (the double impact of potential rate reversal and wage inflation)

  • Support clients on product/portfolio diversification strategies (long-term): BFS firms entering and/or expanding their asset and wealth management business as part of their revenue diversification plan will spike. We hold onto our growth forecast in this segment with renewed affirmation from the market
  • Pivot to growth pockets that will be less impacted: Not all lines of businesses will be equally affected. There’s a glimmer of hope for a revival in investment banking, private equity, treasury, and brokerage spending on technology outsourcing. However, cards and payments will stay flat, and lending might struggle

Looking ahead, BFS firms will cautiously approach technology and outsourcing spending, resulting in another quarter of soft demand. We also expect increased medium-term regulatory actions leading to spending increases across risk and compliance functions for non-SIFIs.

Rippling effects across geographies

The recent bank failures have an underlying mix of bank-specific (micro) and macro-economic factors in play. The macro factors have the potential to increase fear in the markets (and depositors) as government bond yields have shown signs of reversing their course, and the added factors of slower economic recovery, inflation, high-interest rates, and the resulting layoffs in specific sectors add further pressure.

Credit Suisse saw a 20% fall in share price on fears of a liquidity crunch on March 15. This also impacted shares of other European banks, such as BNP Paribas, Societe Generale, Commerzbank, and Deutsche Bank falling between 8% and 10%.

We are closely observing the market and regulatory actions and are available for any questions you or your teams might have about the impact of these latest banking trends. Please reach out to Ronak Doshi, [email protected], Kriti Gupta, [email protected], or Pranati Dave, [email protected].

Learn about key trends and the outlook for the global services market in 2023 in our webinar, Global Services: Lessons from 2022 and Key Trends Shaping 2023.

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