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.