Net Interest Margin

This Page's Content Was Last Updated: August 28, 2025
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What You Should Know

  • Net Interest Margin (NIM) measures the profitability of a lending business. It shows the proportion of Net Interest Income (NII) to Average Earning Assets.
  • NIM should be considered together with credit risk metrics to judge the success of a lending business.
  • Generally, a higher NIM comes together with a riskier loan portfolio, so two different NIMs are not comparable without understanding the credit risks for both portfolios.
  • During recession: Credit quality deteriorates and loan demand weakens, pressuring NIMs
  • Post-recession: Central banks often keep rates low to stimulate growth, which can compress NIMs

Net Interest Margin (NIM) is a key profitability metric for financial institutions that measures the difference between the interest income generated from lending activities and the interest paid out to depositors, relative to the bank's interest-earning assets.

Net Interest Margin Example

For example, if a bank earns $10M in interest from loans, pays $4M in interest to depositors and has an average earning assets of $100M, the Net Interest Margin can be caluclated as follows:

Net Interest Margin (NIM) for the big 5 Canadian Banks

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Q1 2022Q2 2022Q3 2022Q4 2022Q1 2023Q2 2023Q3 2023Q4 2023Q1 2024Q2 2024Q3 2024Q4 2024Q1 2025Q2 2025
RBC Net Interest Margin99%99%99%99%99%99%99%99%99%1.50%1.58%1.68%1.6%1.64%
TD Net Interest Margin99%99%99%99%99%99%99%99%99%1.70%1.71%1.71%1.66%1.76%
Scotiabank Net Interest Margin99%99%99%99%99%99%99%99%99%1.44%1.48%1.50%1.54%1.56%
CIBC Net Interest Margin99%99%99%99%99%99%99%99%99%1.88%1.87%1.73%1.5%1.54%
BMO Net Interest Margin99%99%99%99%99%99%99%99%1.57%1.51%1.51%1.70%1.62%1.60%

Net Interest Margin Key Components

Interest Income

Interest income refers to interest earnings from the loan portfolio and other interest-bearing assets. The loan portfolio includes mortgages, business loans, personal loans, credit cards, and other loan instruments.

Other interest-bearing assets include: Securities, Cash and Balances with Central Banks, Interbank Lending, Lease Financing, and Trade Financing.

Interest is also earned in market activities including: Reverse repurchase agreements, Interest rate swaps (net interest received), Trading assets, and Margin loans to brokerage clients.

Interest Expense

These include all liabilities that require interest to be paid. These may include:

  • customer deposits (e.g., savings accounts, GICs);
  • borrowed funds (e.g., interbank borrowing, repurchase agreements);
  • other interest-bearing liabilities (e.g., bonds issued by the bank, advances from the central bank, interest rate swaps).

Average Interest Earning Assets

This metric refers to the value of all assets that pay interest, averaged over a period of time. Canadian banks' quarterly reports provide the average interest-earning assets for the applicable quarter.

Types of Interest-Earning Assets

Asset TypeCategoryProducts
LoansResidential Lending
  • Residential mortgages
  • Home equity lines of credit (HELOCs)
  • Home improvement loans
Consumer Lending
  • Personal loans
  • Credit card receivables
  • Auto loans
  • Student loans
  • Other consumer credit
Commercial Lending
  • Commercial mortgages
  • Business term loans
  • Equipment financing
  • Construction loans
  • Commercial lines of credit
  • Trade financing
SecuritiesGovernment Securities
  • Treasury bills
  • Government bonds
  • Local Government bonds
  • Agency securities (e.g., CMBs)
Non-Government Securities
  • Corporate bonds
  • Asset-backed securities
  • Mortgage-backed securities
  • Commercial paper
Interbank & InstitutionalCentral Bank Deposits
  • Required reserves
  • Excess reserves
  • Other central bank deposits
Other Assets
  • Bank Deposits
  • Due from banks
  • Nostro accounts
  • Time deposits at other institutions
Other Earning Assets
  • Money Market Assets
  • Reverse repurchase agreements
  • Interbank loans
  • Lease Financing
  • Direct financing leases
  • Equipment leases
  • Vehicle leases
  • Interest-bearing trading securities
  • Margin loans
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Important Considerations:

  • Higher NIM generally indicates better profitability on the company’s earning assets.
  • NIM varies significantly by market and economic conditions
  • Central bank rates heavily influence NIM
  • Different business models lead to varying NIMs (e.g., traditional banks vs. digital banks)
  • Asset mix and funding sources impact NIM

Net Interest Margin and Risk Management of Loan Portfolios

There is a significant connection between NIM and loan portfolio risk. Generally, higher NIMs often correlate with riskier loan portfolios due to several key relationships:

  • Risk-Return Tradeoff
    • More competitors (traditional banks, fintechs, credit unions) can lead to:
      • Lower lending rates as institutions compete for quality borrowers
      • Higher deposit rates to attract and retain funding
      • Overall NIM compression

    Yield Curve Shape

    • Steep yield curve (long-term rates much higher than short-term): Favors higher NIMs as banks borrow short and lend long.
    • Flat or inverted yield curve: Compresses NIMs by reducing the spread between funding costs and lending rates.

    Regulatory Environment

    • Capital requirements affect lending capacity and pricing
    • Liquidity rules influence funding strategies and costs
    • Consumer protection rules can impact fee income and lending practices

    How Different business models lead to varying NIMs

    Different business models lead to varying NIMs because of their distinct lending, funding, and operations approaches. Here's how it breaks down across various types of financial institutions:

    Traditional Banks

    • Typically have moderate NIMs (2-4%)
    • Benefit from stable, low-cost deposit base
    • Higher operating costs from branch networks
    • Diversified lending across consumer, commercial, and mortgage loans
  • Capital Requirements
    • Riskier loan portfolios require banks to hold more capital
    • This affects the bank's cost structure and required return
    • May influence pricing decisions and, ultimately, NIM

This relationship means that while a higher NIM might indicate better profitability, it could also signal higher risk exposure in the loan portfolio. Metrics such as provision for credit losses (PCL), allowance for credit losses (ACL), and net write-offs allow investors to assess the risk associated with the NIM. Regulators and investors often examine both metrics together for a more complete risk assessment. Note that the banking leverage ratio itself is not a very good indicator of the risk taken on by a bank.

Net Interest Margin in Different Economic Conditions

NIM varies significantly based on market and economic conditions due to several key factors:

Interest Rate Environment

  • When interest rates rise:NIM increases initially as banks can reprice loans faster than deposits, but it normalizes eventually as the competition for deposits reduces the gap between loan and deposit interest rates.
  • When interest rates fall: Depending on the reason for the interest rate change, some banks may hold their interest rates steady if they believe it’s a short-term fluctuation. Depending on the bank policies, the interest rates on deposits may come down faster than on loans, which may also create a short-term increase in NIM.
  • During prolonged low-rate periods: NIMs tend to compress because there's a practical floor on deposit rates (can't go below zero), loan yields fall with market rates, and competition for quality loans intensifies.

Economic Growth Phases

  • During Expansion: Higher loan demand leads to a larger interest rate spread, which leads to higher NIMs. The effect of expansion on the NIM depends on the competition for deposits.
  • During Recession: Credit quality deteriorates and loan demand weakens, pressuring NIMs to decrease. Banks may also face higher allowance for credit losses (ACL) andprovisions for credit losses (PCL).
  • Post-recession: Central banks often keep rates low to stimulate growth, which can compress NIMs while experiencing an increase in earning assets.

Market Competition

More competitors (traditional banks, fintechs, credit unions) can lead to:

  • Lower lending rates as institutions compete for quality borrowers
  • Higher deposit rates to attract and retain funding
  • Overall NIM compression

Yield Curve Shape

  • Normal Yield Curve: Favors higher NIMs as banks borrow short and lend long.
  • Flat Yield Curve: Reduces NIM due to a lower spread between the borrowing and lending rates.
  • Inverted Yield Curve: This curve compresses NIMs initially due to the mismatch between funding costs and lending rates, but stabilizes in a prolonged inverted yield curve period. Banks may use other instruments to stabilize income in this environment. This may include a shift to fee-based income, frequent loan repricing, and a focus on shorter-term lending.

Regulatory Environment

A tight regulatory environment rarely increases Net Interest Margin, but it may help stabilize it and avoid unnecessary risk-taking by financial institutions, which may have a large impact on financial markets and the economy. The following policies are often implemented by the regulators that directly affect the NIM:

  • Capital requirements affect lending capacity and pricing
  • Liquidity rules influence funding strategies and costs
  • Consumer protection rules can impact fee income and lending practices

Net Interest Margin of Different Business Models

Different business models lead to varying NIMs because of their distinct lending, funding, and operations approaches. Here's how it breaks down across various types of financial institutions:

Business ModelNIMLoans StructureDeposits StructureOperational CostsBusiness Example
Traditional Banks2% - 4%Diversified across consumer, commercial, and mortgage loansStable, low-costHigher Costs due to large overhead and physical locationsRBC, TD, BMO, CIBC, Scotiabank, National Bank
Digital BanksLower NIMsSpecialized in one or a few areas, such as credit cards or personal loans.Less stable, with some of the highest costs for depositsLower costs due to technology integration, small overhead, and lack of physical locations.KOHO, Neo Financial
Credit Unions*Generally Higher NIMs than Traditional BanksOften offers lower loan rates for consumer and mortgage lending than a traditional bank.Offers better deposit rates than a traditional bankHas a smaller headcount than a traditional bank, but may not be operationally as efficient.Desjardins
Specialized Lenders5% or moreSpecific high-yield segment. E.g. credit cards, auto loans, personal loans.Low-to-no deposit funding. Higher funding costs due to lack of deposits. More reliant on wholesale funding and securitization.Low infrastructure costs, but higher overhead costs.First National Financial LP; MCAP
Investment BanksVolatile NIM is typically not a metric of focus.Less reliant on traditional lending and more on income from underwriting, corporate loans and securities.Minimal retail deposits. It is usually funded through capital markets and interbank lending.High talent cost due to global operations, compliance, and technology.Goldman Sachs, RBC Capital Markets

*Credit unions do not have large trading books, which typically lowers banks NIM. Further their regulation is lighter, so they have a larger portion of their loan portfolio in higher margin consumer loans and less in lower margin mortgages relative to large banks.

The key factors driving these differences are:

  • Cost of funding (deposit vs. wholesale funding mix)
  • Operating cost structure
  • Target customer segments
  • Product mix and specialization
  • Regulatory requirements
  • Competition in their market segment

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Disclaimer:

  • Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
  • The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
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  • Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.