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Net Interest Margin

Net Interest Margin



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Published by: topeq on Mar 27, 2008
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Net Interest Margin
) is a measure of the difference between interestincome generated by banks or other financial institutions by their lending and interest paid on borrowings (for example, deposits). It is considered analogous to the gross margin of non-financial companies. Net interest margin is expressed asnet interest income(interest earned minus interest paid on borrowed funds) as a percentage of earning assets (any asset, such as a loan, thatgenerates interest income). Net interest margin is similar tonet interest spread; net interest spread expresses thenominal average difference between borrowing and lending rates, without compensatingfor the fact that the amount of earning assets and borrowed funds may be different. Net interest spread is generally higher than net interest margin, as banks may need tokeep a certain amount of assets in non-interest bearing assets (such as cash balances heldat branches for customers or liquid reserves as determined by banking regulators).
Interest yield is calculated as a percentage of average earning assets or interest bearingassets. For example, a bank has average loans to customers of $100, and earns interestincome of $6. The interest yield is 6/100 = 6%. Net interest income is the interest earnedminus the interest paid.
A bank has net interest income of $5 on outstanding average loans of $100. The bank'snet interest margin is 5/100 = 5%.
Successful Bank Asset/Liability Management: A Guide to the Future Beyond Gap, JohnW. Bitner, Robert A. Goddard, 1992, p. 185.
A performance metric that examines how successful a firm's investment decisions arecompared to its debt situations. A negative value denotes that the firm did not make anoptimal decision, because interest expenses were greater than the amount of returns generated by investments.Calculated as:For example, ABC Corp has a return on investment of $1,000,000, an interest expense of $2,000,000 and average earning assets of $10,000,000. ABC Corp's net interest marginwould be -10%. This would mean that ABC Corp has lost more money due to interestexpenses than was earned from investments. In this case, ABC Corp would have been better off if it had used the investment funds to pay off debts instead to making aninvestment.
Net Interest Income
From Wikipedia, the free encyclopedia
Jump to:navigation, search All firmscan divide the balance sheet intoassetsandliabilities. For  banksthe assets are commercial and personal loans, mortgages, construction loans and securities. Theliabilities are deposits from customers. The
net interest income
(NII) is then thedifference between the revenues on the assets and the cost of servicing the liabilities. Notice that both cash flows are not interest payments. In other words, the NII is thedifference between the interest payments to the bank on loans and the interest payments by the bank to the customers on the deposits. NII = {Interest payments on assets} - {Interest payments on liablities}Depending on the banks specific portfolio of assets and liabilities (fixed or floating rate)the banks NII can be more or less sensitive to changes in interest rates. If the banksliabilities reprice faster than its assets it is said to be liability sensitive. Further, the bank is asset sensitive if the liabilities reprice more slowly than the assets. The exposure of NIIto interest rate changes can be measured by thedollar maturity gap(DMG), which is thedifference between the assets that reprice and the liabilities that reprice within a period of time.

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