What is Net Interest Margin?

Net Interest Margin is a popular profitability ratio used by banks, which helps them determine the success of firms in investing in comparison to the expenses on the same investments and is calculated as Investment income minus interest expenses (this step is referred to as netting) divided by the average earning assets.

Net Interest Margin (NIM) Formula

This ratio talks about the NIM, meaning how much interest an investor receives over how much she pays out.

Here’s the formula.

Net Interest Margin = (Interest Received – Interest Paid) / Average Invested Assets

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When an investor invests money in bonds or other investment instruments, she gets a percentage of interest on her investments.

At the same time, if we assume that the money invested is borrowed, then the investor (and the borrower) also need to pay interest to the lender of the money.

In this formula, we are trying to find out the difference between the interest received and the interest paid. And then, we would compare the difference between the average invested assets to find out the proportion.

Average invested assets are the average of all the investments. We take average invested assets to find out the median of all invested assets to ease out the differences among the invested assets.

Examples

Let’s take a simple example to illustrate this concept

In this scenario, we need to determine the interest rate for each side.

First, we will determine how much Xavier has to pay to the bank. And then, we will calculate the interest that Xavier will receive.

  • Xavier will pay = ($100,000 * 10%) = $10,000 to the bank.And Xavier will receive at the end of the year = [$100,000 * (1 + 0.9/4)4 – 1)] = [$100,000 * (2.252 – 1)] = [$100,000 * 1.252] = $125,200 from the investment.The interest received from the investment would be = ($125,200 – $100,000) = $25,200.

Using the Net Interest Margin formula, we get –

  • NIM = (Interest Received – Interest Paid) / Average Invested AssetsOr, NIM = ($25,200 – $10,000) / $100,000 = $15,200 / $100,000 = 15.2%.

Use of Net Interest Margin

  • It is a ratio every bank uses. It’s because banks are taking deposits from investors and then using the same money to earn interests in other investments.NIM is one of the most common ratios used to compare the performance of the banks.For an individual investor, the net interest margin would also be useful as she would see how much she earns and how much she pays proportionately.NIM is a measure of how well an investment strategyInvestment StrategyInvestment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus amount, holding period, retirement age, industry of choice, and so on.read more is executed. If the NIM is less, there is room for improvement, and if the NIM is well on target, then maybe the investor may continue with the same sort of investments (the range and the instruments, both).

Net Interest Margin Calculator

You can use the following Calculator.

NIM in Excel (with excel template)

Let us now do the same example above in Excel. It is very simple. You need to provide the two inputs of Interest Received and Interest Paid.

You can easily calculate the Net Interest Margin ratio in the template provided.

Net Interest Margin Formula

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