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March 2018 |
Citi GPS: Global Perspectives & Solutions |
Chapter C: Core Banking, Cloud and Challengers
Banks invested in the first mainframe computers as far back as the 1950-60s. Over 50 years and a myriad of computing innovations later, the majority of the incumbent banks still use legacy systems that are mainframe based, often running outdated COBOL language. Admittedly, while replacing these core banking systems has proved to be a costly and time-consuming affair as can be testified by the Australian banks, which have led the way, the status quo is not an option.
We are of the opinion that core infrastructure overhauls will only gain importance over next few years as legacy bank IT systems have arguably reached the point of redundancy as complex integration of outdated systems is becoming too costly. Factors likely to drive greater IT investments include: (1) New and improved tech, such as cloud adoption, present more options to bank CEOs; (2) Greater focus on data quality, accessibility, standardization, and utilization; (3) Rising customer expectations, which could accelerate with open banking initiatives; (4) A major cyber breach; and (5) Even greater investor focus on cost savings.
IT expenses as a percentage of revenues are notably higher in the Banking industry than any other (~9%) and almost 2-3x those of other major industries. Our bottomup analysis indicates that approximately. 15-25% of banks' annual costs are allocated to IT.
Figure 55. Median IT Expense as % of Business Entity Revenue (2016) |
Figure 56. Nearly 15-25% of Banks’ Annual Budget Allocated to IT, 2016 |
8.7% |
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5.2% |
4.2% |
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3.4% |
3.4% |
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3.1% |
3.0% |
2.4% |
2.4% |
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1.7% |
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1.1% |
1.1% |
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Banking |
High Tech |
Utilities |
Insurance |
Pharma, Healthcare & Medical Devices |
Financial Services |
Food, Beverage & Leisure Automotice, Aviation & Transport |
Consumer Products, Srvs & Retail Mfg, Chemicals & Agriculture |
Metals, Mining, Building & Constr. |
Energy |
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# Total IT expenditure includes operating expenditure and IT capital expenditure Source: Citi Research, CEB, CEB IT Budget Benchmark, Arlington VA, 2016, p.6
IT Operating Expenditure 
IT Capex 
IT Personnel Compensation
7%
8%
5%
2%
11%
7%
Low-End |
High-End |
*Based primarily on banks in the EU, U.S., and Australia Source: Citi Research
Australian banks are the biggest spenders on tech and communication amongst the developed market banks, with non-staff costs at c.11% of their total expenses, followed by Europe and the U.S. Interestingly, Australian banks have also increased their IT spend as a percent of total costs since 2010, as have the Americans, unlike European banks that have been on a starvation diet during a period of rolling crises and now face a period of potential catch-up spending.
© 2018 Citigroup
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