What is Net Interest Margins (NIM)?

Banks are likely to deliver a softer growth in the quarter ended September 2024, led by slower credit growth and moderation in net interest margins (NIM).

• Net interest margin are expected to decline by 2-10 basis points sequentially given pressure on cost of funds resulting from repricing of deposits.
• “Banks are expected to deliver yet another soft quarter with modest earnings growth in Q2 FY25.
• Pre-provision operating profit (PPoP) growth will remain muted, led by weak Net Interest Income (NII) growth (due to lower NIMs and slower loan growth).
• It expects banks in its coverage universe to report a nearly 10 per cent year-on-year growth in earnings in the July-September 2024 quarter.

What Is Net Interest Margin?

Net interest margin (NIM) is the net interest income a lender earns from credit products like loans and mortgages, minus the interest it pays to holders of savings accounts and certificates of deposit (CDs). Expressed as a percentage, the NIM shows how likely a bank or investment firm is to thrive over the long haul. This metric helps prospective investors determine whether or not to invest in a financial services firm by showing its interest income versus their interest expenses.

Simply put: a positive net interest margin suggests that an entity operates profitably, while a negative figure implies investment inefficiency. In the latter scenario, a firm may take corrective action by applying funds toward outstanding debt or shifting those assets towards more profitable investments.

Consider the following fictitious example:

Assume Company ABC boasts a return on investment of $1,000,000, an interest expense of $2,000,000, and average earning assets of $10,000,000. In this scenario, ABC’s net interest margin totals -10%, indicating that it lost more money due to interest expenses than it earned from its investments. This firm would likely fare better if it used its investment funds to pay off debts rather than making this investment.