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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 ↓

The net interest margin formula

Net Interest Margin = Net Interest Income / Average Earning Assets

Two ways to grow net interest income

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.

Read a real bank's net interest margin

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.

Reading the direction of a margin, not the level

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?

Why net interest margin travels across bank sizes

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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