What is the Net Interest Margin?
The Net Interest Margin (NIM) is a profitability ratio that compares the interest income earned by a bank or financial institution to the interest paid to customers, expressed as a percentage.
How to Calculate Net Interest Margin?
The lending business model of a bank or financial institution is oriented around structuring debt products, such as loans and bonds, to consumer or corporate borrowers in exchange for periodic interest payments across the borrowing term and the repayment of the original debt principal at maturity.
There are two parts to the structure of the traditional lending business model:
- Interest Income → The lender earns interest on their loan portfolio, in which debt is provided to borrowers in exchange for interest payments (“inflow”).
- Interest Expense → The lender must pay Interest on customer deposits, which aside from protection of funds, is the incentive for customers to open and maintain an active checking or savings account (“outflow”).
In terms of the lending portfolio of a bank, interest-earning assets include primarily bank loans, mortgages, and other financing products.
In contrast, the interest-bearing liabilities within the portfolio consist of customer deposits and borrowings from other banks.
The net interest income (NII) is a comparison between the income generated from interest-earning assets to the interest expense burden incurred from interest-bearing liabilities.
Conceptually, the net interest margin (NIM) reflects the percent net interest “spread” on the loan portfolio.
The net interest income (NII) must be a positive value – where interest income exceeds interest expense – for the lending model to be sustainable over the long term.
The step-by-step process to calculate the net interest margin (NIM) is as follows.
- Calculate Net Interest Income (NII)
- Determine Average Interest-Bearing Assets in Loan Portfolio
- Divide Net Interest Income (NII) by the Average Interest-Bearing Assets in the Loan Portfolio
- Multiply the Resulting Figure by 100 to Convert into a Percentage
Net Interest Margin Formula
The formula to calculate the net interest margin (NIM) is as follows.
- Net Interest Income (NII) = Interest Income – Interest Expense
- Average Interest-Earning Assets = (Beginning + Ending Interest-Earning Assets) ÷ 2
Net Interest Margin Calculator
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Net Interest Margin Calculation Example (NIM)
Suppose we’re tasked with calculating the net interest margin (NIM) of Morgan Stanley (NYSE: MS) for fiscal years ending 2021 and 2022.
In 2022, the average
|Net Interest Margin (NIM)|
|($ in millions)||2021A||2022A|
|Morgan Stanley (NYSE: MS)|
|(–) Interest Expense||(1,366)||(12,268)|
|Net Interest Income||$8,045||$9,327|
The financial data was sourced from the following section of Morgan Stanley’s 10-K.
Morgan Stanley Financials (Source: MS FY-22 10-K)
The net interest income (NII) of Morgan Stanley was $8,045 million and $9,327 million in 2021 and 2022, respectively.
- Net Interest Income (NII) – 2021A = $9,411 million – $1,366 million = $8,045 million
- Net Interest Income (NII) – 2022A = $21,595 million – $12,268 million = $9,327 million
- NII % Growth Rate = ($9,327 million ÷ $8,045 million) – 1 = 15.9%
By dividing the net interest income (NII) by the average interest-bearing assets in the corresponding period, we can determine the net interest margin (NIM).
- Net Interest Margin (NIM) – 2021A = $8,045 million ÷ $881,770 million = 0.9%
- Net Interest Margin (NIM) – 2022A = $9,327 million ÷ $912,898 million = 1.0%