Net interest margin (NIM) is defined as which?

• A. (Interest income minus interest expense) divided by earning assets
• B. Interest income divided by total assets
• C. Net income divided by equity
• D. The difference between loan yield and funding cost, ignoring assets

Answer: (A)

Net interest margin shows how much net interest income a bank earns per unit of earning assets. It is calculated as (interest income minus interest expense) divided by average earning assets. The numerator reflects the net amount earned from lending and other interest-earning activities after picking up the cost of funds. The denominator uses earning assets—loans, securities, and other assets that generate interest—to scale the measure to the size of the bank’s interest-earning portfolio. This treatment captures both how well the bank lends (the spread between yields and funding costs) and how large its base of earning assets is. In short, NIM focuses on net interest earnings relative to the volume of assets that actually earn interest, rather than just overall income or equity, and it differs from measures that ignore the asset base or look at ROE.