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Net Interest Margin

Net interest margin shows the profitability of the lending business for a bank or other financial institution. Lending business is the core business for most of the banks, and the profitability of this operational segment is very important. This financial ratio may say a lot not only about the single bank but also about the whole market. It is quite good if this margin reaches 3% under normal conditions in the matured market; however, in very competitive markets interest margin may be in the range of 1%-2%.

Net interest margin formula

(1) Net interest margin = (Interest income – Interest expenses) / Yielding assets

(2) Net interest margin = Net interest income / Total assets


* ‘Yielding assets’ are loans and other assets that earn interest; however, many analysts that calculate this financial ratio for the banks in practice use ‘total assets’ in the denominator. If assets changes significantly over the period, then average meaning should be used.


‘Net interest margin’ depends on many factors:

  • Quality of a loan and deposit portfolio is a key factor. If bank succeeds to get deposits at low rate and finds good clients for loans that can pay high rate, it can earn good interest.
  • Risk of the loans has a lot of influence to the interest rates. Normally, higher risk loan portfolio will earn higher interest margin. Longer-term debt is also considered as riskier.
  • Segment of loans and deposits also impacts net interest margin. Banks that deal with smaller clients can have higher ‘interest rate spread’ because the competition for larger clients is higher. 
  • Risk in the market changes all the time. Attitude to the risk is one of the main factors in the interest rate determination. During financial turmoil lending interest rate increases, but the total loan portfolio rotates slowly, and it takes time till affects net interest income. 
  • Competition in the market also has a critical importance. Net interest margin is significantly lower in countries where lending business is very competitive. 
  • Large equity share in capital structure may increase net income margin because interest is not paid for shareholders and dividends are not included in the calculation.



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