Renewed banking confidence has resulted in Government-backed National Savings & Investments (NS&I) recording the largest downturn in its history, it has been revealed.
The group said the "flight to safety" of scared savers flocking to the institution is now over and it faces a "more challenging sales environment" as consumers withdraw their savings to find better rates.
Gross cash outflows of a reported £4.5 billion during the three months to the end of June compared to inflows of £3.2 billion over the same period left the NS&I profits down by a record £1 billion.
This is a stark contrast to the results in the last financial year, which saw a net financing surplus of £12.5 billion and inflows of £26 billion during the height of the financial meltdown.
But sales have since suffered as its products have become less attractive after the group lowered interest rates and slashed payouts on its Premium Bonds prize money because of historically low interest rates.
The chances of winning the £1 million Premium Bonds jackpot were halved when one of the two top prizes was withdrawn earlier this year, while the minimum prize was also cut from £50 to £25.
Jane Platt, chief executive of NS&I, said product sales across the board were impacted by competition from banking rivals amid a "change in consumer behaviour".
"Consumers appear to have regained confidence in the financial services sector, which is excellent news," she said.
She added NS&I was competing against a "more rate driven market".
The grim first quarter figures come after a bumper year for NS&I, which was forced to pull discretionary marketing last year in an effort to stem the tide of new business.
The group revealed it increased sales by more than £2 billion through its website and contact centre in the last financial year, to £7.5 billion.
However, NS&I has altered its remit for the current year to maintain net financing at zero, meaning it is likely to need to attract £14 billion in sales to counteract an expected £14 billion in outflows over the year.
NS&I increased the rate of interest on its income bond in mid-May to improve its competitiveness, while it recently introduced two new products and said its portfolio will be reviewed regularly.
The group said its Government-set target for the year ahead was to balance the interest of savers, the taxpayer and to support stability in the wider financial services market.
NS&I was formed in 1861 as the Post Office Savings Bank and became a government department in 1969, when it was renamed National Savings.
It is one of the largest savings operations in the UK, with nearly 27 million customers and over £94 billion invested. It also runs Premium Bonds, which are held by more than 23 million people.
Copyright © Press Association 2009