Credit crunch squeezes IT budget

01 April 2008News

IT budgets are flatlining as UK banks expect market downturn to deepen.

UK financial institutions are tightening their belts as the credit crunch digs in, with plans for spending on IT bottoming out, according to the most recent Financial Services Survey from the Confederation of British Industry and PricewaterhouseCoopers. This is a sharp reversal from the previous survey in January that found FIs planning to increase investment in IT, which was at its strongest since September 1997.

Commenting on the turnaround, Andrew Gray, UK banking advisory leader, PwC, said that the last survey covered the end of the year where the IT spend had already been budgeted in before the downturn started. “Now we are seeing a realignment of IT budgets and banks are more conservative in spend. They are looking to support existing customers and invest in core business. They are not investing in new products or going after new customers,” he said. Only 38% said they were looking to reach new customers, compared to 63% in March 2007, and 44% said they were looking to provide new services, compared to 63% last year; 78% were investing to increase efficiency/speed.

Other findings of the survey were:

▪ Business sentiment among financial services firms has continued to worsen, and a balance of 29% reported that they are less optimistic about the overall business situation in their sector than they were in December.

▪ Business volumes fell sharply, as 17% of respondents said volumes had grown in the last three months to early March, while 47% said they had decreased. The resulting balance of -30% followed December’s near 17-year low of 33%, and was worse than expected.

▪ 44% of respondents reported a fall in the value of fees, commissions and premiums, while income from net interest, investment and trading also fell sharply. Both of these income categories are expected to fall heavily again over the next three months.

▪ 25% said that they had cut jobs over the past three months, which is the highest rate since March 2003. Firms’ expectations for employment over the next few months (a balance of 33% expecting numbers employed to be reduced) were the weakest since December 2002.

▪ Even more firms think the credit squeeze will be prolonged that did so three months ago – 90% believe that it will last longer that six months compared to 70% last quarter. Nearly all businesses (97%) believe that there is a good chance that credit conditions will get worse over the next six months – 35% said it was a “high” likelihood and 62% saying it was “medium”.

▪ 40% of firms believe that their ability to raise funds will be a constraint on business growth in the coming 12 months. This is up from 24% last quarter.

▪ Capital investment in buildings and plants and machinery are at their lowest since 1992.

Ian McCafferty, CBI chief economist, said that this is clearly a “particularly serious financial issue”, and, although it hasn’t had a significant effect broad economy yet, the real economy won’t get away scot free. “The markets have gummed up and there is little trust amongst market participants. Unravelling that degree of difficulty will take time – there is no silver bullet to open up markets. The survey shows that there is recognition across the industry that it is going to take some time before everything is back to normal.”