What is Net Interest Income?
Net Interest Income (NII) is a profit metric equal to the difference between a bank’s total interest income and the interest expense incurred.
How to Calculate Net Interest Income (Step-by-Step)
Net interest income is a measure of profitability most often used within the financial sector, e.g. banks and institutional lenders.
In order to calculate the NII metric, the process involves subtracting a company’s interest expense from its interest income.
- Interest Income: The interest earned by the bank’s outstanding loan portfolio (“cash inflow”).
- Interest Expense: The interest paid by the bank on outstanding customer deposits (“cash outflow”).
Net Interest Income Formula
The formula for calculating net interest income is as follows.
The business model of a bank is based on structuring loans to individuals or corporate borrowers in exchange for periodic interest payments until the date of maturity.
At maturity, the borrower is obligated to return the original principal amount to the lender, including all accumulated interest, if applicable (i.e. paid-in-kind interest).
Within a lending portfolio, the interest-earning assets consist of mostly loans, mortgages, and other financing products.
On the other hand, the bank’s interest-bearing liabilities consist of customer deposits and borrowings from other banks.
Net Interest Margin Formula
If you want to compare a bank’s profitability to that of its industry peers, the net interest income can be divided by the average value of its interest-earning assets.
The resulting percentage is called the “net interest margin”, which is standardized and thus better suited for historical comparisons year-over-year to compare against industry peers.
Net Interest Income Calculator — Excel Model Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Step 1. Loan Portfolio and Interest Rate Assumptions
Suppose we have a bank with an average outstanding loan portfolio amounting to $600 million.
The “average” is calculated as the sum of the beginning and end-of-period values of the bank’s outstanding loans, divided by two.
The average interest rate on loans will be assumed as 4.0% for purposes of simplicity.
- Loan Portfolio = $600 million
- Interest Rate = 4.0%
As for the customer deposits at the bank, the average value is $200 million, and the applicable interest rate is 1.0%.
- Loan Portfolio = $400 million
- Interest Rate = 1.0%
Step 2. Net Interest Income Calculation (NII)
Using those assumptions, we can calculate the bank’s interest income as $24 million and its interest expense as $4 million.
- Interest Income = $600 million * 4.0% = $24 million
- Interest Expense = $400 million * 1.0% = $4 million
The difference between the bank’s interest income and interest expense is $20 million, which represents its net interest income for the current year.
- Net Interest Income = $24 million – $4 million = $20 million
