Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Net Interest Income

What it is:

Net interest income is the difference between interest received from assets and interest paid on liabilities. 

How it works (Example):

The formula for net interest income is:

Net Interest Income = Interest Received - Interest Paid

Let's assume XYZ Bank earns $1,000,000 for the month on its mortgage loans, commercial loans, and personal loans. It also pays $975,000 in interest to its depositors for their CDs, checking accounts, and savings vehicles. Using the formula above, XYZ Bank's net interest income is:

Net Interest Income = $1,000,000 - $975,000 = $25,000

Why it Matters:

Net interest income can be positive or negative, and it is listed on the income statement.

In regard to banks, net interest income should go up as the yield curve steepens (long-term rates rise faster than short-term rates) because the bank is able to pay depositors a relatively low rate, but it can charge its borrowers a higher rate.