Net Interest Margin (NIM)
Definition
Net interest margin measures a bank's core lending profitability: net interest income (interest earned on loans and securities minus interest paid on deposits and borrowings) divided by average interest-earning assets, expressed as an annualized percentage.
NIM captures the borrow-short/lend-long spread business. It expands when asset yields reprice up faster than funding costs — often early in a hiking cycle for banks with sticky, low-cost deposits — and compresses when deposit competition forces funding costs up or when the curve inverts. A bank's 'deposit beta' (how much of a policy-rate change is passed through to depositors) is a key NIM driver.
Because banks make money on the spread itself, interest is an operating item for them — one reason standard EV/EBITDA analysis doesn't work for banks and FIG uses equity-side metrics instead.
Why interviewers ask
The signature FIG interview metric: expect 'what is NIM and what happens to it when the Fed hikes/cuts?' The nuanced answer covers asset repricing vs deposit betas and the yield curve's shape. It also explains the FIG valuation toolkit — P/E, P/TBV, dividend discount models — since EV-based metrics break down for banks.
Related terms
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