Net Interest Income

Net Interest Income

Net interest income (NII) is the difference between the interest a financial institution earns on its interest-bearing assets and the interest it pays on its interest-bearing liabilities. It is a core measure of a bank’s ability to generate revenue from lending and investing activities.

How NII works

• Interest-earning assets: loans (mortgages, auto, personal, commercial), bonds, securities.
• Interest-bearing liabilities: customer deposits, borrowed funds.
• NII is sensitive to:
• The mix of assets and liabilities (types of loans, fixed vs. variable rates).
• Credit quality (defaults reduce interest receipts).
• The broader interest-rate environment set by central banks.

About 25% of U.S. banks’ pre-expense income comes from non-interest sources; NII is a major but not sole driver of profitability. In 2023, FDIC-insured banks reported aggregate NII of about $698.9 billion. Large banks also saw meaningful year-over-year NII gains in 2023.

How to calculate NII

Net Interest Income = Interest Income − Interest Expense

• Interest income: total interest earned on loans, securities, and investments.
• Interest expense: total interest paid on deposits, borrowings, and other debt.

You can find NII reported in a bank’s quarterly and annual financial statements.

Examples

Example 1 — Simple bank
* Loans: $50,000,000 at 6% → $3,000,000
* Government securities: $30,000,000 at 4% → $1,200,000
* Total interest income: $4,200,000
* Deposits: $60,000,000 at 2% → $1,200,000
* Borrowings: $20,000,000 at 3% → $600,000
* Total interest expense: $1,800,000
* NII = $4,200,000 − $1,800,000 = $2,400,000

Example 2 — Larger scale
* Loan portfolio: $1,000,000,000 at 5% → $50,000,000 interest income
* Deposits: $1,200,000,000 at 2% → $24,000,000 interest expense
* NII = $50,000,000 − $24,000,000 = $26,000,000

Net Interest Margin (NIM)

Net Interest Margin expresses NII as a percentage of average interest-earning assets:
NIM = (NII / Average interest-earning assets) × 100

NIM helps compare profitability across banks of different sizes. Historically, U.S. NIMs have often ranged in the low single digits (e.g., around 3–4% in recent cycles), but they vary with market conditions.

Other important metrics

When evaluating a bank, consider NII alongside:
* Return on Assets (ROA): net income divided by total assets; measures how efficiently assets generate profit.
* Fee and non-interest income: investment banking, advisory fees, service charges can materially affect overall profitability.
* Provision for credit losses and operating expenses: these reduce the net benefit of NII.

How interest rates affect consumers and banks

• For consumers: higher interest rates increase borrowing costs (mortgages, auto loans, credit cards), and variable-rate borrowers see higher payments.
• For banks: rising rates can increase interest income on variable-rate assets, but they may also raise funding costs; the net effect depends on asset/liability composition and repricing timing.

Conclusion

NII is a foundational measure of a bank’s core lending profitability, calculated as interest earned minus interest paid. It should be assessed together with NIM, credit quality, operating expenses, and non-interest revenue to understand a bank’s overall financial health.