What net interest margin is typical for a bank?
The average net interest margin (NIM) for US banks was 3.5% in 2019. This figure shows a slight rebound from a 30-year low of 2.98% in 2015. But the long-term trend has been more or less to the decline since 1996, when the average figure was 4.3%.
Explanation of net interest margin
In finance, the net interest margin is a measure of the difference between interest paid and interest received, adjusted by the total amount of interest-generating assets held by the bank.
Key points to remember
- The Net Interest Margin (NIM) reveals the amount of money a bank earns in interest on loans compared to the amount it pays in interest on deposits.
- NIM is an indicator of the profitability and growth of a bank.
- The average NIM of U.S. banks was 3.3% in 2018.
- The long-term trend has been declining since 1996, when the average was 4.3%.
In short, the net interest margin is an indicator of a bank’s profitability and growth. It reveals how much the bank earns in interest on its loans versus how much it pays in interest on deposits.
For example, say a bank made loans equivalent to $ 100 million in one year, which generated $ 5.5 million in interest income. That same year, the bank paid $ 2.5 million in interest to its depositors.
The bank’s net interest margin can be calculated using the following formula: net interest margin = ($ 5.5 million – $ 2.5 million) / $ 100 million = 0, 03, or 3%.
Net interest margin is not the same as net margin Interest income. Net interest income is the numerator in the net interest margin equation, but the denominator is the total assets of the bank, and this can change in proportions that are not reflected in the numerator.
Net interest margin is also not the same as profitability. Most banks also earn significant income from commissions and service charges of all kinds, and these are not reflected in the net interest margin.
Typical and relative net interest margin
A number of factors affect a bank’s net interest margin. For example, supply and demand for loans help establish market interest rates. Monetary policy and banking regulations set by the Federal Reserve can increase or decrease the demand for deposit accounts and the demand for loans.
If the demand for savings increases relative to the demand for credit, the net interest margin is likely to decline. The reverse is true if the demand for credit is higher than the savings.
The net interest margin varies from bank to bank depending on their business models. For example, Wells Fargo had an annualized net interest margin for the first quarter of 2019 of 3.10%. During the same period, JPMorgan Chase had an NIM of 2.88%. Meanwhile, Capital One Financial had an annualized net interest margin of 7.22% for the first quarter of 2019.
That’s not to say that Capital One is more than twice as profitable or even twice as efficient as Wells Fargo or JPMorgan Chase. Every business focuses on financial instruments to earn income. However, this suggests that Capital One is reacting more flexibly in a changing rate environment.
The net interest margin for all U.S. banks is regular by the economic research arm of the Federal Reserve in Saint-Louis. The figure for each bank is shown in its quarterly and annual reports.