Net interest margin

Investment Dictionary: Net Interest Margin

A performance metric that examines how successful a firm's investment decisions are compared to its debt situations. A negative value denotes that the firm did not make an optimal decision, because interest expenses were greater than the amount of returns generated by investments.

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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 margin would be -10%. This would mean that ABC Corp has lost more money due to interest expenses 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 an investment.

Related Links:
Learn what it means to do your homework on a company's performance and reporting practices before investing. Advanced Financial Statement Analysis
Learn this easy-to-understand technique of analyzing a company's financial statements and reports. Introduction To Fundamental Analysis

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Banking Dictionary: Net Interest Margin (NIM)

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Percentage difference between the interest income produced by a bank's earning assets (loans and investments) and its major expense-interest paid to its depositors. The net difference between interest earned and interest paid is a key measure of bank profitability.

Wikipedia: Net interest margin

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Net Interest Margin (NIM) is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders(for example, deposits), relative to the amount of their assets. It is similar to the gross margin of non-financial companies.

It is usually expressed as a percentage of what the financial institution earns on loans in a time period and other assets minus the interest paid on borrowed funds divided by the average amount of the assets on which it earned income in that time period (the average earning assets).

Net interest margin is similar in concept to net interest spread, but the net interest spread is the nominal average difference between the borrowing and the lending rates, without compensating for the fact that the earning assets and the borrowed funds may be different instruments and differ in volume. The net interest margin can therefore be higher (or occasionally lower) than the net interest spread.

1 Calculation
2 References
3 Net Interest Margin Management Software
4 See also

Calculation

NIM is calculated as a percentage of interest bearing assets. For example, a bank's average loans to customers was $100.00 in a year while it earned interest income of $6.00 and paid interest of $3.00. The NIM then is computed as ($6 - $3) / $100 or 3%.

Net interest income equals the interest earned minus the interest paid out to customers.

References

Successful Bank Asset/Liability Management: A Guide to the Future Beyond Gap, John W. Bitner, Robert A. Goddard, 1992, p. 185.