The recent lackluster stock performance of some bank outsourcing vendors is probably not a harbinger of bad times for the industry, experts said.
Though consolidation in the banking industry is thinning the ranks of potential customers, demand for outsourcing services is in fact growing, as large banks grow more receptive to handing over certain computing tasks to third parties.
If cynicism exists in the market, experts said, it is probably linked to the performance over the past few months of Electronic Data Systems Corp., which is by far the largest provider of bank outsourcing services.
The Plano, Tex.-based company reported lower-than-expected earnings for 1996, and its stock dropped precipitously when investors first got wind of the company's yearend prospects. It was trading late Friday at around $45- nearly $20 off its $60-plus price in October.
"Investors are concerned about what's going on in the outsourcing industry after they saw what happened to EDS," said Stephen T. McLellan, analyst at Merrill Lynch & Co. "There have been months of under- performance."
Several other providers of bank outsourcing services have hit hard times recently in the market, including Affiliated Computer Services Inc., Computer Sciences Corp., and the Bisys Group.
But experts said the stock performance of these companies is not necessarily an indicator of the health of the bank outsourcing market, because each of these companies participates in lines of business outside of banking.
In addition, as these companies struggle, others are faring well. The parent companies of the three vendors ranking behind EDS in bank outsourcing-Alltel Corp., Fiserv Inc., and Marshall & Ilsley Corp.-all have risen in the months since EDS' mini-crash.
Such signs lead some experts to assert that bank outsourcing may actually rank among the strongest lines of business for technology companies involved in a variety of industries.
Anthony A. Lombardi, vice president and chief financial analyst at Dean Witter Reynolds Inc., notes that the push to increase efficiency in banking "plays right into the hands of these bank outsourcers."
He cited M&I Data Services Inc., the outsourcing unit of Marshall & Ilsley Corp. in Milwaukee, as an example of one of the companies benefiting from banks' increasing willingness to outsource.
"Ever since we have covered them we have highlighted that as a key positive," he said.
M&I Data provides outsourcing services to more than 700 banks, and Mr. Lombardi said shareholders would strongly benefit if the parent bank were to spin off the unit.
Michael Hayford, executive vice president at Marshall & Ilsley, said the company likes the revenue stream M&I Data brings in.
He noted that the diversification outside the traditional banking business provides his company with an annuity should banking suffer in an economic downturn.