What Is Net Interest Income?

Net interest income is a financial performance measure that reflects the difference between the revenue generated from a bank's interest-bearing assets and the expenses associated with paying on its interest-bearing liabilities. A typical bank's assets consist of all forms of personal and commercial loans, mortgages, and securities. The liabilities are interest-bearing 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.

Key Takeaways

  • Net interest income reflects the difference between the revenue generated from a bank's interest-bearing assets and the expenses associated with paying its interest-bearing liabilities.
  • The type of assets earning interest for the bank can range from mortgages to auto, personal, and commercial real estate loans.
  • The amount of net interest income a bank generates will depend on many factors including the quality of the loan portfolio, the collective interest rates each type of loan carries, as well as whether the loans carry a fixed or variable rate.
  • Banks calculate their net interest income by subtracting the interest they must pay out to their clients from the interest income they generate.
  • You can find a bank's net interest income in its quarterly and annual reports.

Understanding Net Interest Income

The net interest income of some banks is more sensitive to changes in interest rates than others. This can be the result of several factors such as the type of assets and liabilities that are held as well as whether or not the assets and liabilities have fixed or variable rates. Naturally, banks with variable rate assets and liabilities will be more sensitive to changes in the interest rates than those with fixed-rate holdings.

The type of assets earning interest for the bank can range from mortgages to auto, personal, and commercial real estate loans. These loans all typically carry different levels of risk, thus the interest rate the bank earns for each type of loan will vary. For example, a personal loan will almost always carry a higher interest rate than a mortgage.

The resulting net interest income from a bank's assets will depend on the makeup of their holdings. Moreover, loans of the same type can carry fixed rates or variables rates, depending on the consumer. This is frequently seen with mortgages, as most banks offer both fixed- and adjustable-rate mortgages.

The quality of the loan portfolio is another factor affecting net interest income. Circumstances such as a deteriorating economy and heavy job losses can cause borrowers to default on their loans, resulting in a lower net interest income.

Example of Net Interest Income

If a bank has a loan portfolio of $1 billion earning an average of 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 its interest expense will be $24 million. The bank will be generating $26 million in net interest income ($50 million in interest revenue minus $24 million in interest expense).

Both JPMorgan Chase (JPM) and Bank of America Corp. (BAC), two of the largest financial institutions in the world, saw serious decreases in their net interest income in FY2020 as compared to FY2019. JPMorgan Chase's net interest income fell by 4.69% in 2020, while Bank of America saw losses of 11.31%.

$128 billion

Q3 2020 net interest income of FDIC-insured banks and saving institutions.

Special Considerations

A bank can earn more interest from its assets than it pays out on its liabilities, but that does not necessarily 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, the bottom line could be negative.

Still, banks can also have additional sources of revenue besides interest received 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's profitability.

Net Interest Income FAQs

What Does Net Interest Income Mean?

Net interest income is the difference between the revenue a bank earns from its interest-bearing assets and the expenses of its interest-bearing liabilities.

How Do You Calculate Net Interest Income?

A bank calculates its net interest income by subtracting the amount of interest-bearing liabilities from its interest-bearing assets.

What Is NII and NIM?

NII or net interest income is the difference between the income a bank earns from its lending activities and the interest it pays to depositors whereas NIM or net interest margin is calculated by dividing NII by the average income earned from interest-producing assets.

What Is Net Interest Income for Banks?

Net interest income is a financial measure used to calculate the difference between the revenue generated from a bank's interest-bearing assets and the expenses associated with paying its interest-bearing liabilities.