Net Interest Margin
Net interest margin is the difference between interest income earned and interest paid, expressed as a percentage of interest-earning assets.
Meaning in Practice
In practice, net interest margin (NIM) measures a bank’s core profitability from lending and deposit-taking activities. It reflects how effectively a bank transforms funding into higher-yielding assets. Changes in interest rates, funding costs, and asset composition directly influence NIM.
Why It Matters
Net interest margin is a key indicator of banking sector profitability and resilience. A stable or rising NIM supports capital generation and lending capacity. Declining margins can signal pressure from competition, low rates, or rising funding costs.
Market Impact
Higher NIMs generally improve bank earnings and can support bank equity valuations. Compressed margins may lead to tighter lending standards or reduced credit growth. Interest rate shifts often directly affect market expectations for bank profitability.
Example
If a bank earns an average of 4 percent on its loan portfolio and pays 2 percent on deposits, its net interest margin is approximately 2 percent before accounting for other costs.