Irish banks have emerged as the most profitable financial institutions in Europe, according to a European Commission report, write Honor Mahony in Brussels and Una McCaffrey

Part of an overall study into the still highly fragmented financial services market in the EU, the report finds that the Republic's banks get back more than half of their total retail income as profits.

The average pretax profit as a share of income across the EU was 29 per cent in 2004, while the Republic's banks had a profitability ratio of slightly more than 50 per cent. The same ratio for the UK was closer to 30 per cent, while for Germany it was less than 20 per cent.

The Commission highlighted the Republic along with Greece, Portugal and Italy as countries "where the margins and spreads are consistently larger than for other country clusters".

At the other end of the scale, the Benelux countries have the lowest profit margins in the euro area.

The report also noted that "the profitability of retail banking activity varies widely across the EU".

"Banks in Austria and Germany generated pre-tax profits of 11 per cent and 17 per cent respectively; among the lowest in Europe. Banks in several members states including Ireland, Spain and Finland were far more profitable, with pre-tax profits of over 40 per cent of gross retail income," continues the report.

While Irish financial institutions have high profit margins, they are also in the lucky position of having among the lowest base costs, making Ireland one of the best places in the EU to have a bank.

"On average banks' operating costs in 2004 amounted to 63 per cent of total retail income. Banks in Spain and Ireland had the lowest cost ratios (45-50 per cent on average), while banks in Germany, Austria and the Netherlands had the highest ratios (75-80 per cent on average)," says the report.

The commission's critical report also shows that customers across the EU pay different costs for their banking services.

While banks in Latvia charged just €15 a year for a current account in 2004, bank customers in Luxembourg could have expected to be charged up to €265 while those in Italy could have expected a bill of €204.

Irish customers paid about €100, according to the Commission's findings.

The cost to Irish consumers for current accounts was found to be € 17 cheaper than the EU average of €119, while mortgage charges were also relatively competitive.

Products where competition has been less obvious were, however, more expensive in the Republic. Irish credit cards cost, on average, €105 in 2004, compared to the EU average of €65. Consumer loans cost an average of €668 in the Republic, while the EU average stood at €367.

Small businesses paid an average of €646 for an Irish current account, while the EU average was €588. They fared better on term loans, however, paying €228 below the EU average of €2,219.

Yesterday's findings come on the back of another Brussels report earlier this year which was equally critical of the high credit card fees being charged across member states.

The commission will now conduct a public consultation on the matter with a final report to be published by the end of the year.