Net Interest Margin (NIM)
Net interest margin is the profitability ratio which is used to measure the efficiency of investment decision making by to management by comparing the expenses, income, and debt of these investments.
In other words, the NIM ratio calculate how much money a firm or company make from the inverting operation of the firm or company.
Definition: What is Net Interest Margin?
NIM ratio used to measure the profit of the company that the company products through the investing activities as a percentage of total investing assets.
Mostly this ratio used by the bank to analyze the investment decision of the bank and use this ratio to analyze the track of the profitability of the lending operation of the bank.
So by using this ratio bank can adjust its lending practice in order to increase the profitability.
From this ratio, you can analyze the decision making of management about the fund investment. If the ratio has a positive result then the decision making of the management is good and from investment company net profit.
But is the ratio is negative then management decision making is poor due to which company get the loss on his investment? With negative ratio expenses of the company is greater than earning.
Net interest margin formula can be calculated by division of difference of investment income and interest expenses by the average earning assets.
Net interest margin = (Investment income – Interest expenses)/Average earning assets
Average earning assets in the above can get by the sum of beginning asset and ending assets and dividing the result by 2 as ( beginning assets + ending assets)/2.
Now we take the example of the bank for NIM. On the financial statement, the bank reported the following terms.
- investment return = 60,000 dollars
- Beginning outstanding loan = 80,000 dollars
- Ending outstanding loan = 150,000 dollars
- Interest paid to depositors = 50,000 dollars
From the above values, we find the values for net Interest and average assets so
Net Interest = $60,000 – $50,000 = $10,000
Average assets= (150,000 + 80,000)/2= 115,000
Now we put the value of net interest and average asset in the formula of NIM to find the net interest margin ratio.
NIM = 10,000/115,000
NIM = 8.7%
Analysis and Interpretation
Investment margin Analyze the decision making of the management, that successful or not the decision making by the management. If the ratio is positive then decision making for the investment is good and the company gets the profit. But the negative ratio shows the failure of the decision making of the management. Because due to this company get the loss on its investment.
In the above example, the company got the 8.7% NIM ratio. it means that company made 9$ behind every 100 dollars investment after paying all the taxes. So this company has good decision making by the management for the current year.
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