Net Interest Income (NII) is a crucial profit metric for banks and financial institutions, representing the difference between the interest they earn from their interest-bearing assets and the interest they pay on their interest-bearing liabilities.
Calculation:
The calculation for Net Interest Income is straightforward:
NII = Total Interest Income – Total Interest Expenses
For financial institutions, the primary sources of:
- Interest Income: include interest earned from commercial and personal loans, mortgages, construction loans, and investment securities.
- Interest Expenses: are mainly the interest paid out on customer deposits and funds borrowed from other financial entities.
NII is a key indicator of a bank's profitability and financial health, as it reflects the earnings from its core lending and borrowing operations. It is often viewed as the banking sector's equivalent of "gross profit." While NII is an absolute dollar figure, the Net Interest Margin (NIM) is a related ratio that divides NII by average interest-earning assets, providing a standardized measure for comparing profitability across different periods or with other institutions.
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