Net Interest Income

 

Net interest income is a financial performance benchmark that shows the distinction between the revenue generated from a bank’s interest-bearing assets and expenses connected with paying on its interest-bearing liabilities. The net interest revenue of some banks is more sensitive to changes in interest rates than others. This can vary according to several factors, such as the type of assets and liabilities that are held as well as if those assets and liabilities have fixed rates or variable rates. Banks with variable rate assets and liabilities will be more sensitive to changes in interest rates than those with fixed-rate assets and liabilities.

Net interest revenue is the difference between interest income and interest expense. It is the principal determinant of the profitability of banks. Net interest income is determined by interest rates on assets and paid for funds, the volume of funds, and mix of funds (portfolio).

The type of assets earning interest for the bank can vary greatly from mortgages to auto loans, personal loans, and commercial real estate loans. This will ultimately affect the interest rate a bank earns on its assets and the resulting net interest income after subtracting interest paid out to depositors. Moreover, loans of the same type can carry fixed rates or variables rates. This is most often seen with mortgages as banks offer fixed-rate and adjustable-rate mortgages.

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