KPI for Measuring of Net Interest Margin posted in category Banking

WinningKPI - Banking - KPI for Measuring of Net Interest Margin posted in category Banking

This indicator is for measuring the net interest margin, in other words the profit margin on money. This is calculated by resting the Interest Expenses from the Interest Income, and dividing it by the Average Earning Assets. The latter stands for investments, funds sold, loans, securities etc.
This KPI is very important in measuring Banking performance and is included in all annual reports. This KPI gives the clear difference between what the bank pays on deposits and borrowings and what it earns on loans and investments.
In case the net margin is low, the management team may use this KPI jointly with other performance and cost related banking KPIs in order to develop strategies and put in place practices to increase the profit margin.
Formula:
(Interest Income- Interest Expenses) / Average Earning Assets x 100

KPI Units: %
KPI Time Frame: update annually

Posted by Oana Boteanu | Help to protect community: Flag for moderation

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Example:

A bank wants to measure the net interest margin for the past one year period.
For the purpose of this example, the following figures will be used, likely to be different in the real banking industry, but perfectly applicable to demonstrate how to calculate the KPI above.

Formula:
(Interest Income- Interest Expenses) / Average Earning Assets x 100

Interest Income: 80 million
Interest expenses: 50 million
Average Earning Assets: 850 million

Net Interest Margin:
(80m-50m) / 850m x 100 = 30m/850m x 100 = 3.5 %

This shows a 3.5 % net interest margin; hence the investment strategy is successful.
Oana Boteanu | + | September 13, 2012 at 10:13 am

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