A bank's interest income less interest paid, divided by average earning assets; the core profitability measure of lending.
NIM is the spread between what a bank earns on loans and securities and what it pays depositors and bondholders. It widens when policy rates rise faster than deposit costs and compresses when depositors finally demand more.
Because banks run heavy financial-leverage, a small NIM produces a respectable return-on-equity. A 25 basis point move in NIM can shift a bank's earnings by a tenth.
Example: Meridian Savings Bank earns $384M of interest on $8.6B of average earning assets and pays $128M, giving $256M of net interest income and a 2.98% NIM.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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