Net Interest Margin (NIM) is a measure of the difference between interest income
generated by banks or other financial institutions by their lending and interest paid on
borrowings (for example, deposits). It is considered analogous to the gross margin of
non-financial companies.
Net interest margin is expressed as net interest income (interest earned minus interest
paid on borrowed funds) as a percentage of earning assets (any asset, such as a loan, that
generates interest income).
Net interest margin is similar to net interest spread; net interest spread expresses the
nominal average difference between borrowing and lending rates, without compensating
for the fact that the amount of earning assets and borrowed funds may be different.
Net interest spread is generally higher than net interest margin, as banks may need to
keep a certain amount of assets in non-interest bearing assets (such as cash balances held
at branches for customers or liquid reserves as determined by banking regulators).
Calculation
Interest yield is calculated as a percentage of average earning assets or interest bearing
assets. For example, a bank has average loans to customers of $100, and earns interest
income of $6. The interest yield is 6/100 = 6%. Net interest income is the interest earned
minus the interest paid.
Example
A bank has net interest income of $5 on outstanding average loans of $100. The bank's
net interest margin is 5/100 = 5%.
References
Successful Bank Asset/Liability Management: A Guide to the Future Beyond Gap, John
W. Bitner, Robert A. Goddard, 1992, p. 185.
A performance metric that examines how successful a firm's investment decisions are
compared to its debt situations. A negative value denotes that the firm did not make an
optimal decision, because interest expenses were greater than the amount of
returns generated by investments.
Calculated as:
For example, ABC Corp has a return on investment of $1,000,000, an interest expense of
$2,000,000 and average earning assets of $10,000,000. ABC Corp's net interest margin
would be -10%. This would mean that ABC Corp has lost more money due to interest
expenses than was earned from investments. In this case, ABC Corp would have been
better off if it had used the investment funds to pay off debts instead to making an
investment.
Net Interest Income
From Wikipedia, the free encyclopedia
Jump to: navigation, search
All firms can divide the balance sheet into assets and liabilities. For banks the assets are
commercial and personal loans, mortgages, construction loans and securities. The
liabilities are deposits from customers. The net interest income (NII) is then the
difference between the revenues on the assets and the cost of servicing the liabilities.
Notice that both cash flows are not interest payments. In other words, the NII is the
difference between the interest payments to the bank on loans and the interest payments
by the bank to the customers on the deposits.
NII = {Interest payments on assets} - {Interest payments on liablities}
Depending on the banks specific portfolio of assets and liabilities (fixed or floating rate)
the banks NII can be more or less sensitive to changes in interest rates. If the banks
liabilities reprice faster than its assets it is said to be liability sensitive. Further, the bank
is asset sensitive if the liabilities reprice more slowly than the assets. The exposure of NII
to interest rate changes can be measured by the dollar maturity gap (DMG), which is the
difference between the assets that reprice and the liabilities that reprice within a period of
time.
Net interest spread
From Wikipedia, the free encyclopedia
Jump to: navigation, search
Net interest spread refers to the difference in borrowing and lending rates of financial
institutions (such as banks) in nominal terms. It is considered analogous to the gross
margin of non-financial companies.
Net interest spread is expressed as interest yield on earning assets (any asset, such as a
loan, that generates interest income) minus interest rates paid on borrowed funds.
Net interest spread is similar to net interest margin; net interest spread expresses the
nominal average difference between borrowing and lending rates, without compensating
for the fact that the amount of earning assets and borrowed funds may be different.
Calculation
Interest yield and interest paid on borrowed funds are calculated as a percentage of
average earning assets or interest bearing assets. For example, a bank has average loans
to customers of $100, and earns gross interest income of $6. The interest yield is 6/100 =
6%.
[edit] Example
A bank takes deposits from customers and pays 1% to those customers. The bank lends
its customers money at 6%. The bank's net interest spread is 5%.
