Bank economics
Net interest margin
Calculate NIM from average earning assets and split it into the spread and the benefit of free funds.
Learning objectives
- Calculate net interest margin on average earning assets
- Build interest income and expense from average balances and rates
- Explain why NIM exceeds the spread when part of the funding pays no interest
Net interest income grows when a bank grows, so on its own it says little about how profitably the bank lends. Net interest margin (NIM) scales NII by the assets that earn it. Analysts compare NIM across banks and over time, and treasurers watch it because every change in rates, deposit mix or loan pricing flows into it.
NIM is a flow (a year's NII) divided by a stock (balances), so the stock is measured as an average over the year. A bank that grew its loans in December earned interest on them for only a few weeks.
NIM = NII ÷ Average earning assets Spread = Yield on earning assets − Cost of interest-bearing liabilities
- NII
- interest income − interest expense for the year
- Earning assets
- assets that earn interest: interbank placements, investment securities and loans (not cash, fixed or other assets)
- Average
- (opening balance + closing balance) ÷ 2
- Yield on earning assets
- interest income ÷ average earning assets
- Cost of interest-bearing liabilities
- interest expense ÷ average interest-bearing liabilities
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.