How Is NIM Different From Spread
Updated on March 12, 2023
NIM or Net interest Margin denotes the difference between the interest income earned on interest earning assets versus the interest paid by a bank or financial institution. Net interest Margin is a measure of the efficacy of the financial institution’s investment decisions. In the case of a bank, if the NPAs are growing, the interest earned would fall and the NIMs will go down. Also, if loan demand goes down in comparison to the demand for savings and deposit products, the NIMs will fall. A high NIM adds to the profitability of the bank. NIM is a good indicator of financial stability of a financial institution.
NIM = (Investment returns – Interest expenses) / average earning on assets
Spread
Spread, on the other hand, has several meanings in finance. Spread refers to the difference between two rates, prices or yields.
1. Spread can be the gap between ask and bid prices of a security like a stock, bond, currency or commodity and is known as a bid-ask spread
2. Spread can also refer to the difference in trading position or the gap between a short and long position known as a spread trade
3. In terms of underwriting, spread is the difference between underwriter’s cost and the cost at which the UW offers it to the public
4. In lending, spread would generally mean the price paid by a borrower above the benchmark yield to avail a loan.
How is NIM different from Spread
NIM and Spread are two different concepts used in finance.
Net Interest Margin is a percentage calculated by dividing interest income less interest expenses by the average earning assets.
NIM = (Interest Income – Interest Expense) / Interest earning assets
Spread, on the other hand, is the difference between the average rate earned on assets minus the average rate paid on liabilities (or Borrowing Cost).
Spread = (Interest Income/ Interest earning assets) – (Interest Expense/ Interest bearing Liabilities)
