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.