Charting Banking II: net interest margin
Net Interest Margin (NIM) = (Interest Income – Interest Expense) / Earning Assets
In simple terms, what a bank does? It borrows money to lend it. That has been historically its main income source until recently, when fees became important. The net interest margin therefore is a very important metric, equivalent to the cost of production of a commodity producer. You will see in the chart several banks that Buffet has had for a long time with very high NIMs, starting with Wells Fargo of course.
With the interest spread becoming more favorable the net interest margin of several institutions has been expanding. For several of the represented banks the NIM is higher than 3% close to the times where they could borrow at 3% lend at 6% and be in the golf course by 3. The old 363 rule, from the times when there was no significant fee income.
Not all bank institutions (Banco Popular BPOP) are in that expanding NIM sweetspot yet since their non accrual assets, very closely related to non performing assets NPAs, can be a drag in the interest income. But NPAs do not even need to improve to start having a positive effect in NIMs, they just need to stabilize.