Net interest margin
Net interest income divided by average interest-earning assets: what a bank earns on its lending and investments after paying for its funding.
Where you will meet it
Net interest margin appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Explain ratios specific to particular industries and how ratios help forecast earnings
“Retailers are judged on same-store sales growth and sales per square metre; hotels on occupancy and revenue per available room, which is occupancy times the average daily rate; airlines on load factor and revenue per available seat mile; banks on net interest margin and on capital ratios such as common equity Tier 1 capital divided by risk-weighted assets.”
- Explain the CAMELS approach to bank analysis, which covers capital adequacy, quality of assets, management, earnings, liquidity and sensitivity, with its main ratios and its limitations
“Earnings looks at the net interest margin, cost to income and how much profit depends on volatile trading or on releases of loan loss reserves.”
- Analyse a bank using its financial statements and other considerations
“The net interest margin equals net interest income divided by average interest-earning assets; a falling margin with rising loan growth may mean the bank is buying volume with price.”
Practise it
Practise net interest margin until it is automatic: questions that explain every wrong option.
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