Net Interest Margin (NIM)

Net interest margin (NIM) is a measure of a lender's profitability equal to its interest income minus its interest expense, divided by its average interest-earning assets and expressed as a percentage. It shows how much a bank earns on the difference between the interest rates it charges on loans and securities and the rates it pays on deposits and other borrowings, relative to the size of the assets that produce that income.

NIM is one of the most closely watched figures in bank financial statements, because for most commercial and retail banks net interest income is the largest source of revenue. Analysts, investors and supervisors use it to compare banks, to track the effect of interest-rate changes, and to judge whether a bank's business model is sustainable.

The standard calculation is:

NIM = (interest income − interest expense) / average interest-earning assets

Suppose a bank has average interest-earning assets of 10 billion during a year. It earns 550 million in interest on loans and securities and pays 250 million in interest to depositors and bondholders. Net interest income is 300 million, and the net interest margin is 300 million divided by 10 billion, or 3.00 percent, which is 300 basis points. If funding costs rise by 50 million while asset yields stay the same, NIM falls to 2.50 percent.

NIM differs from the net interest spread, which is simply the average yield on assets minus the average cost of interest-bearing liabilities. Because a bank also funds itself with equity and non-interest-bearing deposits, NIM is usually somewhat higher than the spread.

• The level of rates. When central banks raise policy rates such as the federal funds rate, loan yields often rise faster than deposit rates, widening margins at first. The share of a rate change that a bank passes on to depositors is called the deposit beta.
• The shape of the yield curve. Banks perform maturity transformation, funding longer-term assets with short-term deposits. A steep yield curve tends to support NIM; a flat or inverted yield curve tends to squeeze it.
• Funding mix. Cheap, stable funding such as demand deposit accounts raises NIM, while reliance on wholesale funding or high-rate term deposits lowers it.
• Asset mix and credit risk. Credit cards and unsecured consumer loans earn higher yields than mortgages or government bonds, but carry higher losses, which are not deducted in NIM.
• Balance sheet usage. A bank with a high advances-to-deposit ratio has more of its funding in higher-yielding loans.

Long periods of very low rates compress margins because deposit rates cannot fall much below zero while asset yields keep declining. This was a widely discussed problem for banks during the era of zero interest-rate policy and, in some European countries and Japan, negative interest rates. When rates rose sharply in 2022 and 2023, many banks reported higher margins, although some later faced higher deposit costs as customers moved money into better-paying alternatives. Policy rates set by central banks feed into margins in every banking system; in the eight West African countries that share the CFA franc, for example, banks' refinancing costs follow the rates set by the BCEAO. Banks often use instruments such as interest rate swaps to manage how quickly their assets and liabilities reprice.

NIM says nothing about credit losses, fees, operating costs or capital. A bank can show a high margin by lending to risky borrowers who later default, and a low-margin bank may still be very profitable if it earns large fee income or runs efficiently. NIM is also affected by accounting choices and by large holdings of low-yielding liquid assets, such as central bank reserves, that regulators may require. For this reason it is read together with return on assets, return on equity, efficiency ratios and regulatory capital measures.

In Islamic banking, where interest is prohibited, the comparable figure is often called net financing margin or net profit margin, calculated from profit earned on sale, lease and partnership contracts minus the profit paid to depositors and investment account holders. Non-bank lenders and fintech platforms also use NIM-like measures to describe the spread between the yield on their loans and their own credit funding costs.