Learn about net interest margin.

 Learn about net interest margin.

As we head into bank earnings, there's a phrase you're probably going to hear a lot of: net interest margin. So, let me tell you exactly what that means. It's the difference between the interest that a bank pays out and what it brings in. In other words, a bank takes in deposits from you and companies, paying interest on those deposits (the money it pays out). Simultaneously, it loans out money to you for your home or to businesses, collecting interest as a result of lending out that money. The disparity between these two numbers is commonly referred to as net interest margin.

To illustrate, if you deposit money in the bank and collect three percent interest, and concurrently borrow money from the bank, paying seven percent on that loan, the difference between those two (four percent) is the net interest margin. To delve into technical details momentarily, the precise definition involves dividing this net interest margin by the average earning assets at the bank. This encompasses various items on the balance sheet, such as stocks and bonds, which remain relatively stable.

This concept gains significance in the current context, particularly with a period of rising interest rates. As interest rates increase, more people are inclined to put their money in savings at the bank, as they're now getting some interest on their savings. Conversely, fewer people may want to borrow money because it's more expensive to do so. This dynamic makes net interest margin particularly relevant at this juncture, and we can anticipate hearing a lot about it once the banks start reporting.