A good percentage means that the company is drawing a profit from the investment. A negative percentage shows exactly the opposite, as the investment earnings went past the interest expenses.
Read on in order to get a better understanding of the formula.
The Formula for the Net Interest Margin
This is a basic formula, but before you get the final result, you must study the sheets very carefully. First of all, you will need to sum up all the investment income and interest expenses. The average earning assets will need to be calculated as well: Average earning assets = (Assets at the beginning of the year + Assets at the end of the year) / 2.
After you have all your numbers, the final step is the net interest margin formula:
Net Interest Margin = (Investment Income – Interest Expenses) / Average Earning Assets.
As a matter of fact, the net interest margin formula can be used for both companies and countries. For example, The Federal Financial Institutions Examination Council released some numbers publicly stating that the trend is going towards 0% but also keeping a steady trend of 3.8% since 1984. During the financial crisis in 2008, all banks were showing zero levels of investment until 2016.
The Basics of the Net Interest Margin
This piece of calculation could show if you have invested your money correctly and if the customer is getting along with your solutions. And yes, this formula could be used for other companies as well, not only for banks and financial companies.
One thing to keep in mind is that interest rates could go down for several reasons. The main reason is the supply and demand for loanable funds when it comes to banks. So, monetary and banking regulations could change the demand for deposits and loans. If the demand for savings increases, then the net interest margin will decrease.
When it comes to banks, they operate by paying depositors to open a bank account. The formula above calculates the difference between the amount of interest a bank pays its depositors and the amount it makes for lending the funds.
Final Thoughts
In conclusion, the formula will help you make smarter and greater decisions regarding your funds. A common mistake that banks make is to raise the interest rates too high. With this happening, depositors will start going to less expensive banks to get a loan. At the same time, if the amount falls below a certain amount, then the depositors could turn around again and choose another bank to invest in.