Hallmarks of Success for Banks: Net Interest Margins

Another simple measure to watch is net interest margin.

Net interest margin
= net interest income / average earning assets

Virtually all banks report net interest margins because it measures lending profitability.

There is a wide variety of net interest margins, depending on the type of lending a bank engages in.

Most banks' margins fall into the 3% - 4% range.

Track margins over time to get a feel for the trend.

If margins are rising:

• Check to see what's been happening with interest rates. (Falling rates generally push up net interest margins.)
• In addition, examine the bank's loan categories to see whether the bank has been moving into different lending areas. For example, credit card loans typically carry much higher interest rates than residential mortgages, but credit card lending is also riskier than lending money secured by a house.

Related posts:
Hallmarks of Success for Banks
Hallmarks of Success for Banks: Strong Capital Base
Hallmarks of Success for Banks: ROE and ROA
Hallmarks of Success for Banks: Efficiency Ratios
Hallmarks of Success for Banks: Net Interest Margins
Hallmarks of Success for Banks: Strong Revenues
Hallmarks of Success for Banks: Price-to-Book