Thursday, November 10, 2005

SSIAs to drive Irish economic growth by 5%

Conor Keane:

THE Irish economy will grow by an extra 5% a year in 2006 and 2007 as consumer spending accelerates by up to 7%, funded by the release of €16 billion from Special Savings Incentive Accounts (SSIA).

A study by Davy Stockbrokers into the impact of SSIAs on the Irish economy and financial institutions estimates the funds saved will come to almost €16bn, factoring in likely investment returns, and not €15bn as is commonly thought.

The report’s authors, analyst Scott Rankin and economist Rossa White, said: “What it not widely known is that using the last published statistics (end-2004), by value, 43% will mature in 2006 with 57% maturing in 2007 by virtue of the fact that ‘early adopters’ put in more money to begin with.

“In other words, the SSIA phenomenon is not as much a 2007 event as is generally believed.

“This is important to understand both from a macroeconomic point of view and from the point of view of investors.”

The Davy duo believe the Irish economy will be boosted in 2006-2007 from higher consumer spending, with some of this washed out via increased imports.

“We assume that 20% of the SSIA pool will be spent and that 50% of the current flow into SSIAs will not be re-saved. This will boost consumer spending to 6.5% in 2006 and 6% in 2007, leading to 5% growth in GNP in both years.

“However, more aggressive assumptions will lead to rapid growth in consumer expenditure and, hence, in the economy overall.”

Davy expects strong competition among financial institutions for SSIA money.

Bank of Ireland-owned Davy said: “Given that the real push will involve longer-term savings and investment products, those firms with the strongest asset management/life arms should do best.

“Among the quoted players, this clearly suggests that both Bank of Ireland and Irish Life and Permanent are in the strongest position as both have been gaining share in life assurance and together account for roughly half the market for new business sales.

“AIB’s Ark Life unit has been losing share while its asset management business has suffered from a poor track record in recent years (though it is recovering).”

Davy said that if the rumoured deal between AIB and Aviva happens, AIB could be in a stronger position to compete by next year.

“Anglo Irish Bank also stands to be a net winner in our view, as it has relatively few SSIAs (c. €100 million at maturity), while it has some of the best deposit rates in the market and a rapidly-growing private banking franchise that has a reputation for developing innovative investment products,” the stockbrokers said.

Davy also noted there will be some deterioration in loan/deposit ratios due to SSIA maturity.

“Hence this could have negative implications for bank margins though it may not be material,” they said.

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