Why NS&I is propping up the savings market
21/07/2020
On Thursday 16th July, HM Treasury announced an update on National Savings & Investments (NS&Is) net financing target for 2020/2021, which has significant ramifications for the savings market. The key highlights of this are:
* NS&I now looks after £193.7bn of savings
* NS&I's net financing target for the year to 31st March 2021, increased to £35bn (with a range of £32bn - £38bn).
* £14.5bn net inflows in NS&Is first quarter (April to June 2020) - £19.9bn in, £6bn out (difference is interest/prizes)
NS&I has been in a group we refer to as the savings big 7 - Barclays, HSBC, Lloyds, Nationwide, NS&I, RBS and Santander hold approximately 75% of the savings balances in the market. Like for like comparisons are difficult to do mid year, as banks don't provide the kind of regular updates that NS&I do, it is likely that NS&I has now gone from being at the bottom of that group to being the second largest savings provider in the UK behind Lloyds Banking Group.
The net financing target is the amount of extra savings that NS&I is targeted to bring in by the Treasury. This is a net figure i.e. it is new money put in to NS&I accounts by savers, plus interest paid in to those accounts, minus monies withdrawn, interest paid away and prizes (paid to Premium Bond winners). The target previously had been £6bn so the move to £35bn is a six fold increase. NS&I is already huge but now it's got a mandate to get even bigger!
For much of the past decade, the best interest rates on savings have been paid by the wave of over 50 new entrants who have entered the savings market. Many of these have come from newly awarded banking licences (there has been 28 new licences in this time) but we have also seen takeovers of near dormant banks, which have then been relaunched, changes to existing banking licences to allow those banks to enter the savings market and international banks join the market. One of the frustrations for savers with these new entrants is that their best savings rates are often short lived. That's not because they aren't delighted to welcome the new savers who flood to them, but that they simply get overwhelmed with new cash which they ultimately need time to lend out. Therefore, they have to reduce rates or withdraw those products or risk the cost of carrying a vast excess of deposits which they can't lend out.
To illustrate the situation, the two new entrants who have the largest amount of savings are Metro (which has a network of branches) and Aldermore (which is an internet based bank without branches). Both are 10 years old. NS&I has grown its balances by £14.5bn in just the past three months whereas its taken Metro its entire history to achieve this and Aldermore has only just gone over £10bn.
Interest rates on savings accounts had been falling pre-Covid-19 but the coronavirus has accelerated this with the amount of lending by banks, and therefore the need for savings to fund this, falling sharply. We also saw a surge in repayment of debt by individuals during lockdown, Bank of England base rate fall to 0.10% and a new Term Funding Scheme introduced for banks - which offers them a cheaper source of funding for their lending than paying savers interest on their accounts costs. Consequently, interest rates have tumbled. Whereas Atom Bank topped the market for 1 Year at 1.65% at the start of March, BLME does so now at just 1%.
NS&I is now best buy for easy access type products on four accounts (Premium Bonds 1.40%, Income Bonds 1.15%, Direct Saver 1%, Direct ISA 0.90%) and, in my opinion, it is now propping up the savings market. These rates are stopping the collapse of pricing on savings products completely and means that I think pricing will hold at around the current levels.
Given this, rates are unlikely to move until NS&I cut their rates. It has increased its lead over competitors in recent weeks so I expect it's Q2 net financing to be stronger than its Q1. I predict it will be over £30bn up on the year by the end of its Q2. It has to give two month's notice of rate changes. Therefore, it looks likely that rate cuts will be announced in August or September, for implementation in October/November, to stem the inflows to avoid exceeding the top end of its range in its Q3 (October to December 2020). Early September announcement seems the most likely to me, with new rates coming in to effect for November.
During that time, we should see the likes of Zopa, Castle Trust, Oxbury, Vive and JN Bank, who have been awarded banking licences but are not yet live in the savings market, start to offer new products. While this will provide some price support, if NS&I do cut in the later stages of the year, their appetite collectively is only likely to be £1 - £2bn in a quarter. This won't fill the gap so expect any rate cuts by NS&I to trigger further falls in savings pricing.