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Net Interest Margin

Updated on March 8, 2023

The term net interest margin is the percentage of net interest earned by a financial institution like a bank. It is derived after considering the difference between the total interest earned and the total interest paid by the financial institution. This equation gives the net interest in absolute terms. This net interest is then divided by the total assets in which the interest income is earned during a specific time period and expressed in terms of percentage.

The formula for calculating the net interest margin is given below

Net interest margin = (Investment returns – Interest expenses) / Average Earning Assets

In this above equation,
Investment returns are the interest revenues earned by the financial institution through lending and interest expense is the interest paid by such institutions on the funds borrowed by them. The term average earning assets refers to the assets that produce income which can include stocks, bonds, certificate of deposits, etc.