Net Interest Margin
Reviewed by Aug 27, 2020| Updated on
What is Net Interest Margin?
Net interest margin ( NIM) is a metric comparing the net interest income created by a financial firm. It is arrived from credit products such as loans and mortgages, with the outgoing interest it charges to savings account holders and deposit certificates (CDs).
Expressed as a percentage, the NIM is an indicator of profitability that telegraphs the probability of an investment firm or bank thriving over the long haul. This metric helps prospective investors determine whether to invest in a given financial services company or not.
Net interest margin can be determined by subtracting interest expenses from interest revenue and then dividing the amount by the total assets earned.
How to read Net Interest Margin?
A positive net interest margin means an enterprise is running profitably. At the same time, a negative figure indicates the inefficiency of the investment. A firm can take corrective action in the latter scenario by applying funds to outstanding debt or transferring those assets to more profitable investments.
Calculation of Net Interest Margin
Net interest margin can be calculated by using the following formula: Net Interest Margin= (IR-IE)/Average Earning Assets where- IR=Investment returns IE=Interest expenses
Factors affecting Net Interest Margin
Multiple factors can influence the net interest margin of a financial institution — the chief among them: supply and demand. If there is a strong demand for savings accounts relative to loans, the margin of net interest decreases as the bank is expected to pay more interest than it earns.
Conversely, if there is increased competition in loans and savings accounts, where more people borrow than save, the net interest margin of a bank rises.
Monetary policies set by central banks may have a significant effect on the net interest margins of a bank. These edicts play a pivotal role in regulating savings and credit demand. Consumers are more likely to borrow money and less likely to save it when interest rates are low. Over time this usually results in higher margins of net interest. Contrary to this, as interest rates increase, loans are more costly, making savings a more appealing choice, thereby reducing the net interest margins.