Don't Expect Banks to Upgrade Anytime Soon, Says Tech Giant

By acquiring Metavante Technologies Inc. and its extensive roster of small and midsize bank clients, Fidelity National Information Services Inc. has attained what is arguably the best view of the entire banking industry's purchasing power.

The view is not very pretty.

After weathering a year of poor sales, the Jacksonville, Fla., vendor sees no improvement in information technology spending before the middle of next year at the earliest.

Hammered by bad loans, rising default rates on consumer credit cards, slumping revenue from transaction fees and many other problems, few banks have made tech spending a priority this year, and Fidelity executives do not expect that to change soon.

"It is what it is; it is going to remain that way for another few quarters, and then hopefully we will move upward from there," Lee Kennedy, the company's vice chairman, told analysts on a conference call late Wednesday to discuss Fidelity's third-quarter results, its first since closing the Metavante acquisition. "It is still our thinking as we move through 2010 and get into the second half, potentially, of 2010, we will see some type of an improvement," he said.

The spending slowdown, a result of the protracted economic slump, has even reached community banks, which until recently had largely continued their technology spending as larger rivals retrenched.

"Some of the large regional institutions are doing quite well and spending money, and others are struggling a little bit more. We have seen community banks in general, up until the last couple quarters, that were doing very well," Kennedy said. "We are looking at a macro environment, which just hasn't given us growth in the last 12 months. So we are just waiting for that to turn around."

David J. Koning, an analyst at the brokerage firm Robert W. Baird & Co., said that the combined heft of Metavante, which catered mainly to small and midsize banks, and Fidelity, which targets similar customers but also has several major banking companies as clients, gives the post-merger company a unique window on financial companies' budgeting.

Koning said that Fidelity's revenue was weaker than the market had expected, especially for licensed software.

"License revenues were down a lot. Anywhere banks can cut discretionary spending, they're doing it," said Koning, who has an "outperform" rating on the company's stock.

Fiserv Inc. in Brookfield, Wis., Fidelity's chief rival, sounded a similarly cautious tone at its analyst day conference last month, Koning said. "Everybody's a little cautious. They don't want to promise more than they can deliver." Before the Fidelity-Metavante team-up, Fiserv was the largest banking technology vendor.

Fidelity said it expects savings of $60 million to $65 million this year from the Metavante purchase and has already achieved $32 million in combined cost savings year-to-date, including $21 million in the third quarter, according to Mike Hayford, a corporate executive vice president and the chief financial officer.

Both companies had been cutting costs in anticipation of the sale, which was announced in April.

For the third quarter, Fidelity reported higher earnings on lower sales.

Its bottom line, net earnings from continuing operations attributable to common stockholders, rose 55% from the year earlier, to $67.6 million, or 35 cents a share. Revenue fell 3.8%, to $850.7 million.

The company attributed the decline to lower license and professional services revenue and to difficult comparisons the year earlier, when it booked certain nonrecurring revenue. Software sales fell 73%.

Fidelity's preferred measure for reporting its results to Wall Street, called adjusted net earnings per share, grew 12.2%, to 46 cents, a penny short of analysts' average estimate.

Its international segment was a bright spot, with revenue up 4.1%, or 12.7% after adjusting for currency fluctuations. But Kennedy cautioned that Banco Santander is planning to move its Brazilian card processing off Fidelity's system there, though Fidelity would continue providing call center and cardholder support services, at least through the end of 2010. That customer accounts for 1% of Fidelity's revenue, he said.

Fidelity processes more than 30 million card accounts for 14 banks in Brazil.

The company also reported Metavante results on the call. Hayford said its net income rose 25%, to $43.9 million, and cash earnings per share rose 28.6%, to 45 cents, on revenue that was flat at $425 million.

For reprint and licensing requests for this article, click here.
Bank technology
MORE FROM AMERICAN BANKER