Is National Savings & Investments a force for good in the savings market?

18/07/2017

The government owned NS&I reported it's financial results for the year to 31st March 2017 at the end of last month. As expected, NS&I had grown their deposits significantly - a whisker shy of £147bn - during the last financial year and continue to account for around 10% of the savings market.

However, there were a couple of other more eye catching points buried in the annual accounts and product reports that caught my attention more and are highly significant in the overall market.

Firstly, the target for the 12 months to 31st March 2018 is to raise £13bn - the middle of the range set by HM Treasury of £10bn - £16bn. Given that NS&I have recently reduced interest rates on a number of products and that their current flagship product is capped at a maximum balance of £3,000, on a less attractive term of 3 Years and beaten by a competitor in the market, you could be forgiven for thinking this year might be one of consolidation.

The fact that NS&I is looking for growth of around 10% in a market growing at 5% a year shows an intent to out grow the market. A government backed savings provider seeking to expand their market share initially sounds very positive. But where might that growth come from?

A look at the balance sheet of NS&I reveals the second thing that really caught my attention in the results. Premium Bonds now account for almost 50% of NS&I's product portfolio and they grew 12.5% in the last year to almost £70bn of balances. To put that in to context, that's more than the combined balance sheets for Aldermore, Shawbrook, Paragon, One Savings, Charter Savings, Ikano, Al-Rayan, Vanquis, Hampshire Trust and RCI Bank who have dominated the Best Buy tables in the savings market in recent years.

With Premium Bonds paying a prize pool of the equivalent of 1.15% on instant access, which has only been beaten by Ulster Bank in 2017, it's no surprise that the product has been popular. With the added opportunity and attraction of potentially earning significantly more, and with limited downside in a low interest environment, it is unlikely that interest (pardon the pun) in Premium Bonds will wain.

Savers may well be grateful for anything that offers some semblance of a reasonable return in the current market. Given the savings market has been propped up by the appetite of the new entrant banks, is it helpful to have a government backed provider so acquisitive and competitive in the market? My view is only if they are helping to widen the market or encourage switching away from the dominant players who account for 85% of savings balances.

The savings market is growing at 5% but it's been around that level historically for a number of years. A look at 2016 figures shows that, while the balances of the big 7 in savings (Barclays, Lloyds, HSBC, RBS, Santander, Nationwide, NS&I) grew less than the market growth, they still grew overall. Therefore, the evidence is limited that NS&I is helping the market particularly. We will monitor the 2017 results closely to see if that picture changes.