Investor/An insider's guide to the market: Unlike his Irish counterpart, UK chancellor of the exchequer Gordon Brown has had to face a tight public finance situation. In particular, tax revenues have persistently failed to meet best expectations in recent years. This contrasts with the Irish experience where tax receipts have come in ahead of budget.
The importance of the financial sector to the UK exchequer is quite startling. Income tax statistics show that high earners (defined as those earning over £100,000 a year) pay one quarter of income tax revenue, compared with 13 per cent in 1997-1998. A high proportion of these would work in the City.
The financial sector also accounted for 25 per cent of corporate tax revenue in 2003-2004. Yet it only accounts for about 10 per cent of UK national output.
It therefore seems that Brown has had to rely on high profit margins and high salaries and bonuses across the financial services sector to balance the books.
While the Irish financial services sector might not be as large relative to the economy as the UK's, it is nonetheless a very important and growing part of the economy. The IFSC has added a vital international dimension to the Irish industry. Despite the low 12.5 per cent rate of corporation tax, financial services produce substantial tax revenue.
Global financial services is a sector that is destined to grow at an above-average rate. In his budget, Brown recognised the importance of the City to the economy by setting up a "high level group to develop a single coherent strategy for promoting its competitive advantage as a location for international finance, especially in emerging markets such as India, China and the Middle East".
Evidence of how well the sector is doing in the Republic came from Bank of Ireland's trading statement, released earlier this week. Earnings per share are expected to grow by 15 per cent in the 12 months to March 31st, 2006. The tone of the statement was upbeat and the positive momentum is expected to continue. Revenues are expected to rise by 7 per cent with costs rising by just 3 per cent.
The bank has placed strategic importance on its programme of cost restructuring, and cost savings are ahead of target. The net interest margin is expected to decline by 20 basis points to 174 basis points reflecting intense competition.
This indicates that a significant portion of the efficiency gains is being passed through to consumers.
On a divisional basis Bank of Ireland Life stands out with a 40 per cent increase in operating profits due to strong sales growth and tight cost control. The asset management division has endured a large outflow of funds over the past two years, but the situation would seem to have stabilised. Assets under management are expected to stand at €45 billion at end-March 2006, compared with €44 billion at end-September 2005.
Year-to-date, the Iseq financial index is up by 9.3 per cent compared with a 7.9 per cent rise in the Iseq Overall index. Trading statements such as those from Bank of Ireland, combined with positive momentum in global financial services, point towards further gains in Irish financial stocks during the year.
