What is 'Net Interest Income'

Net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities. A typical bank's assets consist of all forms of personal and commercial loans, mortgages and securities. The liabilities are the customer deposits. The excess revenue that is generated from the interest earned on assets over the interest paid out on deposits is the net interest income.

BREAKING DOWN 'Net Interest Income'

The net interest income of some banks is more sensitive to changes in interest rates than others. This can vary according to several factors, such as the type of assets and liabilities that are held as well as if those assets and liabilities have fixed rates or variable rates. Banks with variable rate assets and liabilities will be more sensitive to changes in interest rates than those with fixed rate assets and liabilities. Banks with liabilities that reprice more often or quicker than their assets will be more negatively affected by interest rate changes.

The type of assets earning interest for the bank can vary greatly from mortgages to auto loans, personal loans and commercial real estate loans. This will ultimately affect the interest rate a bank earns on its assets and the resulting net interest income after subtracting interest paid to depositors. Moreover, loans of the same type can carry fixed rates or variables rates. This is most often seen with mortgages as banks offer fixed rate and adjustable rate mortgages. Quality of the loan portfolio is also a factor affecting net interest income as circumstances like a deteriorating economy and job losses can cause borrowers to miss payments on their loans and lower the bank's net interest income as a result.

Example of Net Interest Income

If a bank has a loan portfolio of $1 billion earning 5% interest, the bank's interest revenue will be $50 million. On the liability side, if the bank has outstanding customer deposits of $1.2 billion earning 2% interest, then interest expense will be $24 million. With $50 million in interest revenue and subtracting $24 million in interest expense, the bank will be generating $26 million in net interest income.

Precursor To Net Income

A bank can earn more interest from its assets than it pays out on its liabilities, but that does not mean the bank is profitable. Banks like other businesses have additional expenses such as rent, utilities, employee wages, and management salaries. After subtracting these expenses from net interest income, overall profitability could be negative. Still, banks can also have additional sources of revenue besides earnings interest on loans such as fees from investment banking or investment advisory services. Investors should consider ancillary revenue sources and expenses in addition to net interest income when evaluating a bank.

RELATED TERMS
  1. Repricing Opportunity

    The change in interest rate of an interest-sensitive asset or ...
  2. Fixed Interest Rate

    An interest rate on a liability, such as a loan or mortgage, ...
  3. Liability

    Liabilities are defined as a company's legal debts or obligations ...
  4. Interest Sensitive Assets

    Assets held by a bank that are vulnerable to changes in interest ...
  5. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  6. Total Liabilities

    The aggregate of all debts an individual or company is liable ...
Related Articles
  1. Investing

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  2. Personal Finance

    Bank Profitability in the Era of Low Interest Rates

    The "low-for-long" policy on interest rates presents a major challenge to bank profitability.
  3. Personal Finance

    How Banks Set Interest Rates on Your Loans

    Many factors go into how banks set interest rates for loans. Use this information to negotiate the best possible rate when you're borrowing.
  4. Investing

    Calculating Net Interest Margin

    Net interest margin is a metric used to measure the effectiveness of a company’s investment decisions, particularly financial institutions.
  5. Investing

    Bank of America's 3 Key Financial Ratios (BAC)

    Discover some of the key financial ratios that show the quality of Bank of America's loan portfolio and how profitable the bank has been.
  6. Investing

    How Rising Rates Are Hammering Bank Balance Sheets

    The rising interest rates that have fueled bank stocks' rapid gains could also cause billions of dollars in unrealized losses
  7. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  8. Investing

    Examples Of Asset/Liability Management

    In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple.
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  2. Do banks have working capital?

    Learn the reasons why banks do not have working capital due to the lack of typical current assets and liabilities accounts, ... Read Answer >>
Hot Definitions
  1. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  2. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  3. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
  5. Border Adjustment Tax

    A tax levied on goods based on where they are sold – exported goods are exempt from tax; those imported and sold in the ...
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center