Last week First Magnus Financial became the latest mortgage firm to exit the market, announcing last Thursday that it would stop accepting mortgage applications and providing home loans. WNS, in turn, issued a statement on Friday saying that the privately held First Magnus had ended substantially all work with WNS.
WNS, which had reported its fiscal first-quarter results the day before, said Friday that the loss of First Magnus work and the potential for further cuts from other mortgage clients would knock some $16m off its FY2008 revenue.
For the year ending March 31, 2008, WNS had expected a revenue range of $302m to $307m; it now forecasts sales between $286m and $291m. Net income before taxes is expected to come in at $17m, well below its previously stated range of $41m to $43m, WNS said.
The falloff in its mortgage business is also expected to chip away $20m in annual revenue and $4m in pretax net income in years after FY2008, the company added. The news immediately rattled WNS’ shares, which fell 17% last Friday to close at $20.45 on the New York Stock Exchange. The weekend did little to calm investors’ fears, and shares fell nearly 7% on Monday to close at $19.12
In a conference call, the company said that mortgage processing makes up 9% of its revenue and includes nine clients. WNS said that its largest clients in the space were First Magnus, IndyMac, and an unnamed midsized retail bank for which it provides mortgage processing work. The other customers were small players including companies in the title business.
As for IndyMac, the company isn’t a real subprime player, but operates in the market between subprime and prime lending. There’s fear that the current subprime meltdown might spill into this middle area, but WNS said that it had previously lowered it guidance based on adjustments to its business with IndyMac. And the commercial bank has given WNS reasonable assurance for continued processing work, it said.
But the subprime problems have rippled through the broader financial services sectors, especially since the rise of mortgage-based securities has exposed investors such as mutual funds and hedge funds. And the offshore Indian players have plenty of exposure to the wider banking market.
The guys who might get hurt the worst could be the Indian providers, said Todd Furniss, COO of outsourcing advisory firm Everest Group. This is hitting the financial services broadly–it’s fairly pervasive. If you look at who is buying most of the services from India, about 60% are bought by financial services groups. And a good number of captive operations are in India, and many of these are owned by financial services companies.
One of the biggest effects of the subprime situation will be the move to more scalable outsourcing relationships and more variable cost structures, since buyers will want more options to respond quickly to changing market conditions, Furniss told Computer Business Review. He cited past examples such as the dotcom collapse and the travel industry, both scenarios in which companies had to become more scalable as their industries changed rapidly.
With more emphasis on scalability, Furniss expects to see some consolidation among both buyers and suppliers in response to the subprime crisis. There should also be plenty of contract renegotiation starting soon, if it hasn’t started yet, he noted.
Another lesson is that outsourcers will be more cautious in the fundamental structure of contracts. Providers are going to be uncomfortable with taking on ownership of more assets, Furniss said. The risk of default will be a constant fear, so vendors will likely try to minimize their capital exposure in case their mortgage clients are the next to take the fall.
Even tier-one infrastructure players such as IBM, EDS, and CSC could see some trouble due to their large volume of infrastructure business with some of the key financial services companies, which are proving not to be immune to the current mortgage and credit woes.
Furniss expects the subprime problems to begin creeping their way into the outsourcing market in Q4, historically a period of heavy bookings.
But in the long term, the crisis could remind banks to move more work offshore, to keep their cost structures lean and operations flexible. A lot of financial institutions have been going offshore, but not as fast as they would like, or as certain parts of the organization would like, he said, noting that the insurance industry has been sluggish in this regard and that there is still plenty of room within the big financial services firms–typically thought of as the most intrepid of outsourcers–to go offshore.
Even WNS earlier this year had noticed an acceleration from some of its mortgage clients who wanted to cut down costs in response to the subprime crises, the company said.
