Sustained IT spending gives Canadian banks an edge in tough times

While economic challenges are moving banks south of the border to slash IT budgets, Canadian backs appear more resilient and will continue to invest more on new tech projects in 2009, a new report says.

Collectively, IT spending in North American banks will continue to grow from $49.4 billion to $50.3 billion in 2009.

But that marginal increase will actually represent a year-over-year decline in IT spending growth, according to Boston-based financial research firm Celent. It’s the second straight year in a row we will witness such a spending growth decline (3.1 per cent in 2008 and 1.7 per cent in 2009).

The disparity in IT spending between Canadian and U.S. banks is due to the latter cutting back on new investments, and focusing on maintenance to keep the wheels on the bus rolling. Canadian banks, on the other hand, are continuing to spend on new IT projects, increasing their investments by 10 per cent, compared to a 14 per cent decrease south of the border.

“Canada has held it’s own – it’s stable, it’s steady,” says Jacob Jegher, the Montreal-based study author, who is a senior analyst with Celent. “IT spending isn’t as [negatively] affected as with the U.S. banks, Canadian banks have obviously weathered the storm better.”

He says Canadian banks could gain a competitive advantage from the spending disparity. While U.S. banking innovation will be stifled, “Canadian banks will be focused on competitive differentiation and innovation.”

This is especially true for Canadian banks operating in foreign markets. Specifically, Toronto-based TD Bank Financial Group could gain the upper-hand with recent U.S. buys. In recent years, TD has purchased TD Banknorth and Commerce Bancorp and now operate both under the TD Bank brand.

Integrating those two acquisitions will be a focus area for the bank, says TD spokesperson, Simon Townsend. The motto for the U.S. branches is “America’s most convenient bank” and IT spending will reflect that.

Townsend said technology is will help TD emerge from this environment even stronger — whether by playing a role in process re-engineering “so we operate smarter” or enhancing TD’s capabilities in convenience in banking.

Technology spending at TD will support service and convenience for customers, and ongoing integration of the U.S. acquisitions, he adds.

In North America, about three-quarters of a typical bank’s IT budget is dedicated to maintenance of existing systems, according to Celent. That leaves little room for cutbacks, as banks rely on these systems to offer services. But Canadian banks are a step ahead of the U.S. in lowering that cost as they move to modernize systems and become more efficient.

According to Jegher, the goal of banks is to slowly reduce the maintenance budget over time. “Canadian banks have started this process.”

While the U.S. banks will reduce spending on new IT projects, along with ongoing spending on maintenance, Celent says Canadian banks will lower their maintenance budget, while keeping the focus on innovation alive through spending on new projects.

In 2009, North American banks will spend about 64 per cent of their IT budgets on mass-market retail banking – $27.5 billion by U.S. banks and $4.1 billion by Canadian. That’s a growth of 1.2 per cent in the U.S. and a growth of 4.3 per cent in Canada.

Wholesale banking is the second highest target of IT spending, at nearly 25 per cent of the IT budget. U.S. banks will spend $10.9 billion, while Canadian banks will spend $1.5 billion.

American banks are going to be focusing on the wholesale banking sector even more than Canadian banks, Jegher says. With interest rates at historic lows, banks are looking for different sources of profit that are not driven by interest.

“In the U.S. retail is quite low,” he says. “Canadian banks are pretty much status quo, retail banking is going nicely.”

U.S. banks will also cut spending on outside firms and consultants by 1.4 per cent in 2009. Canadian banks are projected to spend 5.1 per cent more on those services in 2009, compared to the previous year.

Celent says IT professionals on both side of the border are probably safe if they work at a bank, as these employees are needed to run the business. Banks in North America spend slightly less than 40 per cent of IT budgets on internal staff.

TD plans to also spend on IT resources that will help employees, Townsend says. But not all IT projects are considered necessary.

“Given the current climate, there’s no question we will take a hard look at the ‘nice-to-do’ projects,” he says. “But we won’t sacrifice investment in the initiatives critical to meeting our business objectives.”

Similar trends are expected in 2010, according to Celent. Growth in North American banks’ IT budgets will again shrink – from 1.7 per cent to 1.3 per cent .

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