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.
Two banks at the same 3% margin
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
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: