Net interest margin of a bank: where the spread comes from and what narrows it

Net interest margin (NIM) is a bank's net interest income divided by its average interest-earning (performing) assets over the same period. Net interest income is the difference between what the bank earned on loans, bonds and funds placed with the central bank and what it paid on deposits, the bonds it issued and the money it borrowed on the interbank market. The margin shows how much the bank squeezes out of every rouble of earning assets in its core intermediation business — and it says nothing about provisions, fees or staff costs.

What goes in the numerator and what goes in the denominator

The numerator comes from the income statement: interest income minus interest expense, before deducting provisions for credit losses. This matters: NIM measures the price of risk, not how that risk plays out. A bank can hold a high margin precisely because it lends at high rates and to risky borrowers, while the losses arrive later, through provisions.

The denominator is average interest-earning assets, usually averaged over the period: either half the sum of the opening and closing balances or the mean of month-end figures. Items that earn no interest are excluded from the base — fixed assets, intangible assets and part of the settlement balances. This is where the main source of non-comparability hides: some banks calculate the margin against average total assets, others only against earning assets, and the second version is always higher. Before comparing two banks, make sure the denominator is the same; the methodology is usually disclosed in the notes to the financial statements, which can be opened in the issuer reports section.

The margin is calculated for a period and expressed on an annualised basis. A quarterly figure is scaled up to a full year, so seasonal effects — deposit repricing, one-off repayments — hit the quarterly margin harder than the annual one.

What NIM is not

Net interest margin is regularly confused with net profit margin: the latter is net profit divided by revenue and applies to any company. For a bank that ratio is almost meaningless, because its "revenue" is a construct made up of interest and fee income rather than the sale of a product. In the same way, NIM should not be mixed up with operating margin: operating margin measures efficiency after expenses, whereas the interest margin is measured before them.

One more distinction: spread versus margin. The interest spread is the difference between the average yield on assets and the average cost of liabilities, in percentage points. The margin also reflects the structure of the balance sheet: the share of free funding, the share of non-earning assets and the use of shareholders' equity as a source of funding. A bank with a large capital base and a sizeable volume of current accounts will run a margin above its spread — on part of its assets it simply pays nothing.

What moves the margin

The key rate reprices assets and liabilities at different speeds. A loan book with fixed rates and long maturities reprices slowly, while deposits reprice quickly, within the term of the deposit. When rates rise sharply, a bank with long fixed-rate assets loses margin first: expenses climb before income does. When the cycle turns, the picture is reversed.

The structure of liabilities matters more than the level of rates. Current and settlement accounts are almost free funding; the higher their share, the more resilient the margin is to swings in rates. Hence the value of a transactional franchise and payroll schemes: they are not about selling services but about buying cheap money.

The structure of assets sets the ceiling. Unsecured retail lending brings high rates and high losses, mortgages bring low rates with long maturities, and a portfolio of OFZ carries low risk and low returns. Shifting the mix towards retail lifts the margin and at the same time raises the future cost of risk.

How to use it in valuation

For a bank, the margin is an input into the earnings model: interest income is broken down into the volume of earning assets and the margin, then provisions are deducted, fees are added and operating expenses are subtracted. This yields the return on equity, which in turn explains why the market pays a given multiple of book value for a bank. When comparing bank valuations in the list of stocks, it is useful to set the multiple against profitability: for SBER, the 3,92 multiple only reads meaningfully alongside the stability of the margin and the quality of the loan book.

The margin also affects payouts: stable interest income is the source of the dividend base, and expected dates are shown in the dividend calendar — upcoming events:

Limitations of the metric

The margin is not comparable across business models: a bank dominated by fees, leasing or an investment banking arm may have a modest interest margin and strong earnings. It is sensitive to accounting policy — to how loan origination fees are allocated, how interest on impaired loans is recognised and how the swaps that close a currency gap are accounted for. And it describes the past: the repricing of liabilities has already happened, while the repricing of assets has not yet.

It is worth saying plainly: a ready-made net interest margin figure may not be available on the instrument page — the metric is disclosed by the banks themselves, and their methodologies differ. In that case the margin is calculated by hand from the financial statements, fixing the chosen denominator and applying it identically to every bank in the comparison. Otherwise the comparison shows a difference in methodologies rather than in businesses.