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L.2 · INTERMEDIATE · 2 MIN

Net Interest Margin: The Spread Engine

If you only learn one bank metric, learn this one. Net interest margin (NIM) measures the spread a bank captures on its core business — the gap between the interest it earns on its assets and the interest it pays for its funding, divided by its earning assets. NIM is to a bank what gross margin is to a manufacturer: the cleanest read on whether the core engine is making money.

Quiz · 5 questions ↓

Formula

Net Interest Margin = Net Interest Income / Average Earning Assets

Key point

A bank can grow net interest income two ways: widen the margin, or grow the assets it earns on. A widening NIM usually reflects a favorable rate environment (it can charge more on new loans faster than it has to pay up for deposits). A compressing NIM means the opposite — funding costs are catching up. Watch the direction, not just the level.

Try it

Open a large bank's stock page and find the **FDIC Regulatory View** panel. Read its net interest margin off the latest call report. For most big US banks it lands somewhere in the 2-4% range — modest per dollar, enormous across trillions of assets.

Check-in

Two banks both report a net interest margin of 3%. Bank A's NIM rose from 2.6% over the past year; Bank B's fell from 3.4%. Which trend is the more encouraging sign?

Key insight

NIM is powerful precisely because it is comparable. A 3% margin means roughly the same thing at a small community bank and a trillion-dollar giant, which is why it is the first number bank analysts reach for when ranking peers.

Check your understanding

Sit with the ideas.

A bank earns 5.5% on its loans and securities and pays 2.5% on its deposits and borrowings. Roughly what is its net interest margin?

Why:
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Other lessons in this course.

  1. 01Why a Bank Reads Backwards
  2. 02Net Interest Margin: The Spread Engine— reading now
  3. 03ROA vs ROE: Why 1% Is a Great Year
  4. 04Is the Bank Safe? Capital and the Call Report
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