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Banks face big bill after software surge

Banks face big bill after software surge

The Big Four banks in Australia are facing a blow-out in deferred information technology costs after the value of computer software assets on their books swelled to almost $2.3 billion in the past year.

The Big Four banks are facing a blow-out in deferred information technology costs after the value of computer software assets on their books swelled to almost $2.3 billion in the past year. The hefty amount is 17 per cent higher than the $1.9 billion in capitalised software expenditure that Westpac Banking Corp, Commonwealth Bank of Australia, National Australia Bank, and Australia and New Zealand Banking Group carried in their accounts in early 2007.

The quartet must eventually pay down the costs they have capitalised, but are likely to face an uphill battle to do so as they prepare to pump hundreds of millions of dollars each into revamps of their core banking systems.

NAB chief executive John Stewart said last week that the bank would spend between $800 million and $1 billion over the next few years as it modernised the information technology platforms used to run its worldwide operations.

It is the biggest budget for systems modernisation yet revealed by a Big Four bank, and dwarfs the $580 million that CBA said in April it would spend replacing its core transactional platforms over the next three years.

"That will refresh most of the systems that need to be refreshed. So the core systems are affected but some of our other systems are relatively modern, so it won't affect them," Mr Stewart told analysts and media as he handed down the company's interim results on Friday.

"It's a global initiative, we will be doing it over a number of years, and probably the Australian businesses will be leading the way."

NAB, like Westpac, is yet to finalise a strategy for replacing its ageing computer platforms, including the decades-old transactional systems that underpin its operations.

Both banks have said in the past week that they will unveil their plans for dealing with the problem later this year, but CBA and ANZ have offered more detail on their approach to introducing more flexibility into the software that drives their businesses.

As announced in April, CBA will replace its core systems with a new platform that will be built on technology from German business software maker SAP.

ANZ chief information officer Peter Dalton revealed last week that his organisation was rolling out a new Finacle core banking platform across its operations over the next three years, starting with Laos and Indonesia in 2008.

Mr Dalton indicated that Finacle, which Indian information technology outsourcer Infosys develops, was the frontrunner to become a new standard core banking system across the ANZ group.

Neither ANZ nor Westpac has disclosed budgets for the modernisation of their transactional platforms but the bills should at least come close to that of CBA.

All four are likely to add significantly to their capitalised software balances during the course of the mammoth upgrades, which have implications both for deferred expenditure and tier one capital allocations.

Capitalised software is classed as an intangible asset and must be deducted from tier one capital, affecting the value of funds a bank has at hand to mitigate against risks.

In late 2006 ANZ, Westpac and CBA applied for transitional relief from the Australian Prudential Regulation Authority when the regulator introduced the rules that require capital deductions for deferred software expenses.

Banks must also pay down their capitalised software assets through amortisation and a review of the Big Four's interim accounts showed that deferred expenses were affecting their ability to restrain information technology costs.

In recent years all of the four pillars have attempted to keep their computer and communications expenditure flat. But both NAB and CBA reported rises in software amortisation during the first half of their 2008 financial years, offsetting some cost cuts.

At NAB, software amortisation increased from $101 million at March 31, 2007 to $118 million this year while CBA's amortisation bill jumped from $30 million a year ago to $42 million.

In the case of CBA the rise in software amortisation was the only significant technology cost increase during the period, and overall computer and communications expenditure dipped to $416 million from $427 million at December 31, 2006.

Fairfax Business Media

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