Banks earn interest on assets such as loans and securities while paying interest on deposits and other funding. Net interest margin helps show how effectively that spread supports earnings.
How it is calculated
Net interest margin is generally calculated as interest income minus interest expense, divided by average earning assets. It is usually expressed as an annualized percentage.
The measure differs from net interest income, which is the dollar difference between interest earned and interest paid.
Why it changes
Market rates can affect asset yields and funding costs at different speeds. Deposit pricing, loan mix, securities, hedging and the timing of repricing all influence the margin.
Two banks operating in the same rate environment can therefore report different margins because their customers, products and balance sheets differ.
Why higher is not automatically better
A higher margin may support earnings, but it can also reflect greater credit risk, longer maturities or a different funding strategy. Margin should be reviewed alongside asset quality, capital, liquidity and operating costs.
The most useful comparison is often the trend over time and performance against institutions with similar business models.
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