Net Interest Margin

Net Interest Margin is a performance metric that examines the success of a financial institution’s investment decisions as contrasted to its debt situations. It is considered to be similar to the gross margin of non-financial companies.

Net Interest Margin

Net Interest Margin is a performance metric that examines the success of a financial institution’s investment decisions as contrasted to its debt situations. It is considered to be similar to the gross margin of non-financial companies.

 

Net Interest Margin Formula

Net interest margin is expressed as net interest income as a percentage of average earning assets.  Net interest income is the interest earned minus interest paid on borrowed funds. An earning asset could be a loan for example.



Net Interest Margin Interpretation

The use of Net Interest Margin is helpful in tracking the profitability of a bank’s investing and lending activities over a specific period of time. A negative Net Interest Margin indicates that interest expenses were higher than the amount of returns produced by investments.



One of the drawbacks of Net Interest Margin is that it does not measure the total profitability of the bank as most of them earn fees and other non-interest income through services like brokerage and deposit account services, without taking account operating expenses, such as personnel and facilities costs, or credit costs.

Also, the Net Interest Margin of two banks cannot always be compared as the nature of their activities, composition of customer base, may be different.


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