How is net interest margin (NIM) defined in banking?

Net interest margin (NIM) is defined as the difference between interest income generated from earning assets, such as loans, and the interest paid out on deposits and other funding sources. This difference is then expressed as a percentage of the total earning assets on the balance sheet. Essentially, NIM measures how effectively a bank is managing its interest income relative to its interest expenses, providing insight into its profitability from its core lending and deposit-taking activities.

A fundamental aspect of NIM is that it specifically focuses on the interest-related operations of a bank, excluding other forms of income such as fees or non-interest income. By calculating NIM, banks can assess the efficiency of their investments in loans and how well they are controlling their funding costs, which directly influences their overall profitability. This metric is especially important as it reflects the bank's ability to maintain a healthy spread between what it earns on loans compared to what it pays on deposits.