Companies2 min read
The margin is the bank: reading net interest margin
A bank is a spread on money. Net interest margin tells you how wide — and whether the width was earned or bought.
Strip away the app, the branch network and the sponsorship of everything with goalposts, and a bank is a simple machine: it borrows money at one price and lends it out at a higher one. Net interest margin — NIM — is the width of that gap, expressed as a percentage of the assets doing the earning. If you only learn to read one line in a bank's results, make it this one.
What the number actually is
NIM is the interest a bank earns on its loans and securities, minus the interest it pays on deposits and wholesale funding, divided by its average interest-earning assets. For a major bank the result is a small number of percentage points — which sounds trivial until you remember it is applied to hundreds of billions of dollars. A move of a few basis points, hundredths of one per cent, is the difference between a strong year and an apology.
What widens it
Cheap funding, mostly. Transaction accounts that pay depositors little or nothing are the crown jewels of banking: near-free money lent back out at mortgage rates. A bank funded by sticky household deposits will, all else equal, out-earn one leaning on term deposits and wholesale markets, where money demands to be paid properly. On the lending side, margin depends on competition — and mortgages, the staple of the Australian majors, are among the most fiercely competed products in the country.
What narrows it
The same forces in reverse. Discounting to win home loans. Depositors waking up and chasing rates — the share of a rate rise a bank must hand to its savers is called the deposit beta, and it is worth watching whenever the cash rate moves. And mix: growth in lower-margin lending dilutes the average even when nothing has been repriced.
The trap
A rising NIM is not automatically good news. A bank can widen its margin overnight by lending to people other banks refused. That is margin today and provisions tomorrow. NIM only means something when it is read alongside credit quality — arrears, impairments, and how conservatively the loan book is provisioned.
The questions worth asking
Is the margin moving because of price, or because of mix? Is the funding base getting cheaper, or just shorter? If the margin is expanding faster than peers', what risk is being taken to buy it? A bank that can answer those questions plainly is a bank you can analyse. One that cannot is just a spread on money with a marketing department.
General information only — not personal financial advice.