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Net interest income
Net interest income is a money term you need to understand. Here’s what it means.
What is net interest income?
Net interest income is the difference between a bank’s revenue generated from the interest earned on assets such as loans, mortgages and securities over the interest paid out on the institution’s deposits.
Some banks are more sensitive to changing interest rates than others. This is dependent on the type of assets and liabilities that the bank holds and whether those assets and liabilities include fixed or variable interest rates.
Banks whose assets and liabilities include variable interest rates are more sensitive to changing rates than banks with mainly fixed rates assets and liabilities.
The type of loans that banks service also can impact the net interest income. For example, the interest on personal loans is significantly higher than the interest on mortgages. However, mortgages have longer payment terms.
The quality of the loans also impacts the bank’s net interest income. A portfolio with a higher percentage of high-risk loans may result in more defaults, in turn resulting in a loss of profit for the bank.
A bank’s net interest income does not solely determine whether a bank is profitable. Net interest income does not account for banks’ additional expenses such as wages, salaries, rent, marketing costs and information technology.
Banks also have additional revenue sources, such as fees for investment banking or advisory services. When evaluating whether to invest in a bank, experts advise investors to consider ancillary revenue sources and expenses as well as the bank’s net interest income.
Net interest income example
A local bank has a loan portfolio of $500 million, earning 4 percent interest. The bank’s interest revenue is $20 million.
The bank has outstanding customer deposits of $400 million, earning 2 percent interest. This means the bank’s interest expenses are $8 million. After accounting for the banks $8 million in expenses, it has $12 million net interest income.
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