What Net Interest Margin Is Typical for a Bank?

The average net interest margin (NIM) for American banks was 3.5% in 2019. That figure shows a slight rebound from a 30-year low of 2.98% in 2015. But the long-term trend has been more or less downward since 1996 when the average figure was 4.3%.

Explaining Net Interest Margin

In finance, net interest margin is a measure of the difference between interest paid and interest received, adjusted for the total amount of interest-generating assets held by the bank.

In short, net interest margin is one indicator of a bank's profitability and growth. It reveals how much the bank is earning in interest on its loans compared to how much it is paying out in interest on deposits.

For example, say a bank made loans equal to $100 million in a year, which generated $5.5 million in interest income. In the same year, the bank paid $2.5 million in interest to its depositors.

The bank's net interest margin can be calculated using 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 net interest income. Net interest income is the numerator in the equation for net interest margin, but the denominator is the bank's total assets, and that can change in proportions that are not reflected in the numerator.

Net interest margin is not the same as profitability, either. Most banks also earn significant income from fees and service charges of various kinds, and those are not reflected in net interest margin.

Typical and Relative Net Interest Margin

A number of factors affect a bank's net interest margin. For example, supply and demand for loans help establish market interest rates. Monetary policy and banking regulations set by the Federal Reserve can increase or decrease the demand for deposit accounts 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.

Net interest margin varies among banks depending on their business models. For example, Wells Fargo had an annualized net interest margin for the first quarter of 2019 of 3.10%. In the same period, JPMorgan Chase had a NIM of 2.88%. Meanwhile, Capital One Financial had a hefty 7.22% annualized net interest margin for the first quarter of 2019.

This doesn't mean that Capital One is more than twice as profitable or even twice as efficient as Wells Fargo or JPMorgan Chase. Each company focuses on different financial instruments to earn income. However, it does suggest that Capital One reacts more flexibly in a changing rate environment.

The net interest margin for all U.S. banks is tracked by the economic research arm of the Federal Reserve of St. Louis. The figure for individual banks is reported in its quarterly and annual reports.