LONDON, Sept 9 (Reuters) - Banks which have patched up theirinformation technology (IT) systems too often in recent yearsface big increases in spending to modernise their operations forthe digital age.
But digital innovation should help offset the outlays bycutting the costs of new branches, which are likely to be 25percent smaller and have a fifth fewer staff, according to areport from Deutsche Bank.
IT costs are likely to rise by about 10 percent over thenext 10 years, broadly offset by a possible 5 percent fall inbranch costs, analysts predicted.
"We expect a material increase in IT spend by banks over thenext 10 years. Core systems are generally old and rely on toomany applications patched too many times to cope with risingtransaction volumes, regulatory change and digital channelchanges in particular," Deutsche analysts Jason Napier and DavidLock said in a note on Monday.
Investment banks and retail banks are already spendingheavily on improving technology to cope with heavy regulation,demands to become more efficient and pressure to get ahead withdigital platforms, Reuters reported in June.
The Deutsche analysts said there is much still to do, butthose who move early can take advantage of higher volumes.
"Most big banks need significant IT renewal. Old mainframesystems are the norm, patched for M&A, geographic and productexpansion, and regulation, which introduces complexity andinefficiencies while volumes continue to rise," the report said.
"Banks that execute best will cope with much higher customertransaction volumes with little cost increase, will be nimblerin pricing and product launches, more adept at adapting thebranch network to changing needs and will drive increasedcustomer loyalty, higher wallet share and lower churn."
Banks are already cutting branches and more big cuts areexpected in countries such as Spain or Italy. Banks have shutabout 20,000 branches across Europe in the last four years,including 5,500 last year.
"Some countries (Italy, Spain) are over-served by existingnetworks but overall we expect branch numbers to edge lower butnot collapse," Deutsche said. (Reporting by Steve Slater; Editing by Louise Heavens)