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Net Interest Margin

Net interest margin, or NIM, is the difference between the interest income a bank earns on its assets, mainly loans and securities, and the interest it pays out on its liabilities, mainly customer deposits and borrowed funds, expressed as a percentage of its interest-earning assets. It is the core profitability engine of a traditional bank: a bank that earns 6% on its loan book while paying 2% on deposits has a rough NIM of 4 percentage points on that business, and that spread, multiplied across its entire balance sheet, is where the bulk of a commercial bank's earnings come from before accounting for fees, trading, and expenses. NIM is not simply a function of where interest rates are, it is a function of how fast a bank's assets and liabilities reprice relative to each other, something analysts call asset-liability duration mismatch. Loans, especially longer-term fixed-rate mortgages and commercial loans made years ago, often reprice slowly. Deposits, particularly in a competitive rate environment, can reprice quickly, savers move cash into higher-yielding savings accounts, CDs, or money-market funds as soon as rates rise, forcing banks to raise what they pay to keep that funding from walking out the door. The speed at which deposit costs catch up to rising benchmark rates is called the deposit beta. When the Fed hikes and deposit betas run high, a bank's funding costs can rise faster than the yields on its existing loan book, compressing NIM even though rates overall are higher. This is why rate hikes are not automatically good news for bank stocks, despite the common intuition that banks profit from a higher-rate world. The net effect depends on the shape of the yield curve, the mix of fixed- versus floating-rate assets a bank holds, and how price-sensitive its depositor base is. A steep curve, where long-term rates sit well above short-term rates, tends to widen NIM for banks that borrow short and lend long. A flat curve, or a hike that pressures deposit costs faster than loan yields adjust, can squeeze it instead.