Technology growth will remain depressed in comparison to pre-crisis forecasts up to 2012, with a net reduction of $40 billion in banks' IT spend over the next five years, a DataMonitor report predicts.
The market analyst has released a report on the impact of the financial crisis on IT budgets within the banking sector. The report: “Impact of Financial Crisis on Technology Spending in Banking”, states that North America and Europe will experience the biggest budget reductions, declining almost 7%.
The economic realities behind the crises around debt manageability, asset prices and confidence in the banking system have not disappeared, even though the collapse of the banking system appears to have been averted in October 2008.
“With the impacts of the financial crisis now well apparent on the real economy, there is a vicious circle deepening between the banking sector and global economy,” says Daniel Mayo, director of analysis for Datamonitor's Financial Services Technology.
The impacts of worldwide government initiatives are unlikely to lead to “green shoots” until well into 2010, he adds.
The need to shore up capital base and manage losses means 2009's banking sector operating income growth will be weak; cost management and reduction is therefore the order of the day, the report says.
While IT budgets are undoubtedly under pressure, it's a whole new ballgame this time around, compared to the last IT downturn cycle - the dot-com crash of the late nineties, says the report. In that crisis, technology was squarely targeted for cost reductions, but now, IT intensity within the banking sector is likely to increase, since it is the ratio of IT cost to overall operating cost base.
The report predicts immediate cost pressures will constrain, but the structural shifts banks are realising are necessary as a result of the crisis, will likely ensure resiliency in many areas of IT spending.
Branch spending will maintain as banks implement technology solutions aimed at ensuring service levels in spite of staff reductions, and banking operations will grow their IT investment to support greater efficiency and to drive costs down.
Banks will also look to re-use existing infrastructure to a larger extent, which will limit immediate vendor opportunity.
There is a silver lining, however. “The downward impact of [the] financial crisis on banking technology spend will be significant. This is a major structural shift in banking and banks will need to adjust their operating cost bases accordingly. However...opportunities for technology vendors to support this required transformation [have] increased. Banks are more open than ever to alternative sourcing approaches, and internal IT departments will likely bear a significant brunt of IT spend reduction pain. 2009 and indeed 2010 are likely to be tough years for vendors, but medium and long-term opportunities remain significant for those who can adapt,” Mayo concludes.
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