BPO heavyweight WNS has already reduced its guidance after one of its customers, First Magnus Financial, closed its doors and has since filed for bankruptcy. Now fellow Indian outsourcers EXLService Holdings and iGate Global Solutions have made mortgage-related reductions in their businesses, although not nearly as dire as at WNS.
In a filing with the Securities and Exchange Commsion, EXLService said one of its customers, which it described as a non-prime mortgage lender, would no longer be originating new loans. As a result, the unnamed company, which accounted for 2% of EXL’s revenue for the first half of the year, would reduce its volume of work with EXL by 60% starting September 1.
But EXL said the reduction will not have a material adverse impact on the company’s operations or financial conditions. In the filing, it reaffirmed its full-year guidance of revenue between $168m and $172m, with earnings per share of $0.74 to $0.78.
iGate, meanwhile, has said that revenue had fallen off from its three mortgage clients. In an interview with Dow Jones, the company said that the mortgage sector now accounts for 7% of revenue, down from 10% in early 2007. One of its customers is GreenPoint Mortgage, which is owned by Capital One and was shut down earlier this week by the credit card company.
iGate said that its mortgage business would continue to feel the effects of the subprime situation and current credit crunch through the fiscal year.
Our View
It’s not just the subprime lenders that are reeling from the market conditions. In fact neither First Magnus not GreenPoint was a true subprime mortgage provider. The former originated mostly prime loans and then sold them on the now-collapsed secondary market to buyers such as mortgage giant CountryWide. GreenPoint specialized in jumbo loans, which don’t meet federal mortgage guidelines, as well as Alt-A loans, which fall somewhere between prime and subprime.
So with the crisis rippling through the lending space, there’s some genuine concern that these mortgage woes might spill over to the broader financial services community, which has some exposure through certain funds’ investments in mortgage-backed securities. Even if outsourcers don’t have too much of their business tied up in mortgage processing, the thinking goes, they could feel the fallout from the big banks that do contribute a healthy amount of their revenue.
So far the only tangible impacts have been at the Indian outsourcers, which typically rely on fewer clients for their total business. Larger, global outsourcers have a more diversified industry footprint and many more customers. Among the Indian players, the impacts have been mixed. WNS took the biggest hit, a $16m drop in expected revenue this year, and its share price has dropped 25% in response.
iGate’s revenue was also affected, although less severely, and the company said it has redeployed 100 of its mortgage workers to other business areas. EXL issued a warning, but only about 1% of its revenue is at stake. Genpact, the biggest Indian BPO, turned in its results this week and said that it had booked $7m of the $15m it expects from mortgage clients this year, and this booked amount is less than 1% of overall revenue.
If the mortgage meltdown indeed spills over into other financial markets, there could be more severe consequences for outsourcers, even the bigger Indian IT firms and global suppliers. But so far the problems seemed well contained in the mortgage sector. The long-term picture, however, may include some consolidation by the mortgage firms that weather the storm, as well as some contract renegotiation from buyers seeking more scalable deals and variable pricing to deal with future market surprises.
