What Is Net Interest Margin?

Net interest margin (NIM) is a measurement comparing the net interest income a financial firm generates from credit products like loans and mortgages, with the outgoing interest it pays holders of savings accounts and certificates of deposit (CDs). Expressed as a percentage, the NIM is a profitability indicator that telegraphs the likelihood of a bank or investment firm thriving over the long haul. This metric helps prospective investors determine whether or not to invest in a given financial services firm. Simply put: a positive net interest margin suggests that an entity operates profitably, while a negative figure implies investment inefficiency. In the latter scenario, a firm may take corrective action by applying funds toward outstanding debt or shifting those assets towards more profitable investments.

Key Takeaways

• Net interest margin is a profitability metric that measures how much a bank earns in interest compared to the outgoing expenditures it pays consumers.
• A positive net interest margin indicates a bank invests efficiently, while a negative return implies investment efficiencies.
• Net interest margin can be calculated by subtracting interest expenses from interest income, then dividing that figure by the average earning assets.
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Calculating Net Interest Margin

Net interest margin may be calculated by the following formula:

﻿\begin{aligned} &\text{Net Interest Margin} = \frac { \text{IR} - \text{IE} }{ \text{Average Earning Assets} } \\ &\textbf{where:} \\ &\text{IR} = \text{Investment returns} \\ &\text{IE} = \text{Interest expenses} \\ \end{aligned}﻿

Historical Net Interest Margins

The Federal Financial Institutions Examination Council (FFIEC) releases an average net interest margin figure for all U.S. banks on a quarterly basis. Historically, this figure has trended downward while averaging about 3.8% since first being recorded in 1984. Recessionary periods coincide with dips in average net interest margins, while periods of economic expansion have witnessed sharp initial increases in the figure, followed by gradual declines.

The overall movement of the average net interest margin has tracked the movement of the federal funds rate over time. Case in point: following the financial crisis of 2008, U.S. banks operated under decreasing net interest margins due to a falling rate that reached near-zero levels from 2008 to 2016. During this recession, the average net interest margin for banks in the U.S. shed nearly a quarter of its value before finally picking up again in 2015.