Net interest margin (NIM) measures the net interest income a bank earns relative to its average interest-earning assets.
A common formulation is:
Net interest margin = annualized net interest income ÷ average interest-earning assets
Net interest income is interest income from loans, securities, and other earning assets minus interest expense on deposits, borrowings, and other interest-bearing funding.
Example
If a bank earns $600 million of interest income, pays $250 million of interest expense, and has $10 billion of average earning assets, its simplified NIM is:
($600 million - $250 million) ÷ $10 billion = 3.5%
What moves NIM
NIM can change because of:
- loan and securities yields;
- deposit and wholesale funding costs;
- fixed-rate versus floating-rate asset mix;
- deposit mix and deposit beta;
- asset and liability repricing speed;
- excess cash or low-yielding assets; and
- hedging and balance-sheet positioning.
That makes NIM especially important when interest rates change quickly.
NIM is not the same as interest rate spread
Interest rate spread usually compares an average yield on earning assets with an average rate paid on interest-bearing liabilities. NIM instead measures net interest income relative to average earning assets and therefore also reflects funding volumes and non-interest-bearing funding.
Reported definitions can differ
Some banks report a tax-equivalent NIM that adjusts income from tax-exempt assets to a taxable-equivalent basis. Others emphasize reported GAAP net interest income. Investors should compare like with like.
NIM is also not a complete measure of bank profitability. A bank can have a strong NIM but weak credit quality, high operating costs, or expensive credit losses.
Investor interpretation
Use NIM alongside the Efficiency Ratio, Loan-to-Deposit Ratio, credit-quality measures, and capital ratios. A rising NIM is generally favorable for pre-provision earnings, but the reason for the change matters.
Sources
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