How to Calculate the Net Interest Margin From a Bank Income Statement

Banks use customer deposits to make loans and invest in securities.

Banks use customer deposits to make loans and invest in securities.

When you consider investing in bank stocks, reviewing their financials might seem like a challenge. But you can calculate a fairly straightforward metric called net interest margin for a good overview of a bank’s business performance. A bank aims to earn more interest on its interest-earning assets, such as mortgages, than it pays to depositors. The difference between the interest earned and interest paid is its net interest income. Net interest margin measures net interest income as a percentage of interest-earning assets. The higher this percentage, the better a bank is at managing its assets and interest requirements.

Gather a bank’s income statement and balance sheet from the period for which you want to calculate its net interest margin and its balance sheet from the previous period. You can find these financial statements in its Form 10-Q quarterly reports and Form 10-K annual reports. Download these reports from the "investor relations" section of its website or from the U.S. Securities and Exchange Commission’s online EDGAR database.

Find the bank’s interest income and interest expense on its income statement.

Subtract the interest expense from the interest income to calculate the bank’s net interest income. For example, assume a bank has $50 million in interest income and $30 million in interest expense on last year’s income statement. Subtract $30 million from $50 million to get $20 million in net interest income.

Identify the bank’s earning assets in the assets section of each balance sheet. Add the amounts to figure the total earning assets for each period. Earning assets include items on which the bank earns interest, such as investment securities, loans and leases. A bank typically specifies which assets earn interest in the footnotes to its financial statements. In this example, assume the bank had $680 million in loans and $70 million in investment securities on last year’s balance sheet and $600 million in loans and $50 million in securities in the previous year. Add $680 million to $70 million to get $750 million in total earning assets last year. The previous year’s earning assets were $650 million.

Add each period’s total earning assets and divide by 2 to determine the average earning assets the bank held during the period. In this example, add $750 million and $650 million to get $1.4 billion. Divide $1.4 billion by 2 to get $700 million in average earning assets.

Divide the bank’s net interest income by its average earning assets. Multiply your result by 100 to calculate its net interest margin as a percentage. Concluding the example, divide $20 million by $700 million to get 0.0286. Multiply 0.0286 by 100 for a 2.86 percent net interest margin.

Tip

  • Compare a bank’s net interest margin with those of other banks to see how it performs relative to its competitors.

Warning

  • A strong net interest margin doesn’t guarantee a profitable investment. Always review a bank’s business and the riskiness of its assets before investing.
 

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