Net Interest Margin

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What is 'Net Interest Margin'

Net interest margin (NIM) is 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:

Net Interest Margin

BREAKING DOWN 'Net Interest Margin'

Financial institutions generate net interest margin from the difference between the cost of lending capital to a borrower versus the cost of raising the capital to lend. In a low interest rate environment, the cost of borrowing from central banks is low, but the margin of the traditional banking business is also lowered. 

Example of Net Interest Margin

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.

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