A:

In the United States, the average net interest margin (NIM) for banks was 3.10% in the first quarter of 2017. Though a rebound from the 30-year low of 2.95 in the first quarter of 2015, it's lower than a decade ago: The net interest margin for American banks in the first quarter of 2007 was 3.33%. A recent peak of 3.84% was reached in the first quarter of 2010. On the surface, this suggests that a typical net interest margin for American banks in the 21st century seems stuck between 3% and 4%.

Notably, the average NIM figure for the five biggest banks in the country s still well below the average NIM figure for the U.S. banking industry. The top five (U.S. Bancorp, Citigroup, Wells Fargo, Bank of America and JP Morgan) averaged 2.59%. This disparity was almost unchanged from the Q1 of 2016. The gap is lessening, though: In the first quarter of 2015, banks with total bank assets between $50 million and $99 billion had net interest margins between 3.5% and 4.1%. Banks at or above $100 billion in assets had net interest margins between 2.5 and 2.8%.

Explaining Net Interest Margin

In finance, the net interest margin measures the difference between interest paid and interest received, adjusted relative to the amount of interest-generating assets.

To illustrate, take the simple case where a bank made loans equal to $100 million in a year. From those loans, it generated $5.5 million in interest income. It also paid out $2.5 million in interest to its depositors.

Calculate this bank's net interest margin with the following formula: Net interest margin = ($5.5 million - $2.5 million) / $100 million = 0.03, or 3%.

Net interest margin is not the same as – and does not correlate perfectly with – net interest income. Net interest income is the numerator in the equation for net interest margin, but the denominator (total assets) can change in proportions not reflected in the numerator.

Net interest margin should not be confused with profitability, either. Most banks earn significant income from fees and service charges, none of which are affected by interest margins.

Typical and Relative Net Interest Margin

Several factors can change the typical net interest margin for banks. For example, the supply and demand for loanable funds helps establish market interest rates. Monetary policy and banking regulations from the Federal Reserve can change the demand for deposits and the demand for loans.

If the demand for savings increases relative to the demand for loans, it is likely that the net interest margin will decrease. The opposite is true if the demand for loans is higher relative to savings.

At the individual institutional level, net interest margin can range dramatically. In 2015, the net interest margin for the sixth-largest financial institution, Bank of New York Mellon Corporation, was only 0.92%. The seventh-largest, Capital One Financial, had a net interest margin of 6%. This doesn't necessarily mean that Capital One is more than six times as efficient as Bank of New York Mellon, since each company focuses on different financial instruments to earn income. However, it does suggest that Capital One has more flexibility in a changing-rate environment.

RELATED FAQS
  1. What types of financial margins should investors pay the most attention to before ...

    Learn what types of financial margins, such as profit and cash margins, an investor should pay the most attention to before ... Read Answer >>
  2. What's the difference between profit margin and operating margin?

    Find out the differences between a company's gross profit margin, net profit margin and operating margin, and what each metric ... Read Answer >>
  3. What is the interest rate offered on a typical margin account?

    Learn about the basics of trading on margin accounts, specifically the rate of interest that is typically charged for margin ... Read Answer >>
  4. Should I look at a company's operating profit or net profit?

    Explore the ways in which investors and market analysts use a company's operating profit and net profit margins for equity ... Read Answer >>
  5. How much can I borrow with a margin account?

    Understand the basics of margin accounts and buying on margin, including what amount investors can typically borrow for purchases ... Read Answer >>
Related Articles
  1. 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.
  2. 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.
  3. Managing Wealth

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look.
  4. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  5. Investing

    Bank of America's 4 Most Profitable Lines of Business (BAC)

    Discover how each of Bank of America's primary lines of business impact the company's bottom line and learn about the factors that affect each one.
  6. Investing

    Regional Banks Face Strong Headwinds (CBF, FITB)

    While regional banks managed profit growth, they are facing strong head winds from a flattening yield curve and slower commercial loan growth.
  7. Managing Wealth

    What's a Good Profit Margin for a Mature Business?

    How to determine if the amount you clear dovetails with the competition.
RELATED TERMS
  1. Net Interest Margin

    A performance metric that examines how successful a firm's investment ...
  2. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  3. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  4. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
  5. Margin Loan Availability

    1. The dollar amount in an existing margin account that is currently ...
  6. Margin Debt

    Margin debt is debt a brokerage customer takes on by trading ...
Trading Center