Net Interest Margin (NIM)

Net Interest Margin (NIM) measures the core profitability of a bank's lending business. It is the difference between the interest income a bank earns on loans and securities and the interest it pays on deposits and other funding, expressed as a percentage of average interest-earning assets.

NIM is to a bank what gross margin is to a manufacturer: the fundamental spread the business model produces before operating costs and credit losses. Typical NIMs for commercial banks run roughly between 2 and 4 percent, varying with the interest-rate environment and the mix of lending.

What Drives NIM

Rising interest rates usually expand NIM at first, because loans reprice upward faster than deposits — though banks that rely on expensive wholesale funding benefit less. Competition, deposit mix, and the balance between low-yield mortgages and higher-yield commercial or consumer lending all shape the margin.

When analyzing a bank, watch the trend: a steadily eroding NIM means the core engine is weakening, and earnings growth must come from riskier lending, fees, or cost cuts. NIM also explains why bank earnings are rate-sensitive in a way most businesses are not.