Bank Woes Breed Trouble in Camelot
We’re seeing an interesting sign of the turmoil at Chinese banks with a new profit and revenue warning from IT outsourcing firm Camelot Information Systems (NYSE: CIS), which is blaming a sudden drop-off in bank spending for the adjustments. Camelot has lowered its third-quarter revenue outlook about 10 percent to $57 million, resulting in a two-thirds reduction in its earnings outlook. (company announcement) It made similar-scale adjustments for the fourth quarter, though clearly the numbers could be further lowered if the situation deteriorates. Camelot shares tumbled 21 percent on the news, and are now nearly 90 percent down from their 52-week high. Two other major outsourcing rivals, HiSoft (Nasdaq: HSFT) and VanceInfo (NYSE: VIT) also fell on the news, down 4.4 percent and 8.7 percent, respectively. Banks are some of the biggest customers for these IT outsourcing firms, and Camelot blamed reduced spending by the sector for its downward revisions. Beijing has been forcing its banks to effectively rein in their spending, mostly in the form of reduced lending, through a steady series of interest rate hikes and boosts to their reserve requirement ratios, as it seeks to cool an overheated economy. The fact that the tightening has trickled all the way down to IT spending is a bit alarming, as this form of spending is critical as the banks update their systems and is insignificant in terms of money compared with the hundreds of billions of yuan that banks lend each year. So if the banks are cutting back on this important and also relatively inexpensive form of spending, their situation could easily be more dire than most people realize. I wouldn’t read too much into this small downward revision by Camelot just yet, but clearly the big sell-off in its shares shows investors are worried this revision may just be the beginning in a big cycle of reduced IT spending by Chinese banks.
Bottom line: Camelot Information Systems’ lowered guidance reflects turmoil at China’s banks, and could mark the start of reduced bank spending on IT for the next 2-3 years.
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