Net interest income
Sector Deep DivesInterest earned on a bank's assets less interest paid on its funding, the largest revenue line for most banks.
Also written: NII
Net interest income is the absolute euro amount a bank earns from the spread between lending and funding. Net interest margin is the same thing expressed as a percentage of interest earning assets.
It is the reason a bank income statement looks nothing like a corporate one. There is no revenue and cost of goods sold; interest income is the top line, and interest expense is a cost of raw material rather than a financing item.
That is precisely why enterprise value is meaningless for a bank. Debt is not financing here, it is the raw material of the business, so there is no coherent way to separate operations from funding. Banks are valued on equity metrics: P/E and price to tangible book.
It is driven by volume, by the shape of the yield curve, and by deposit beta, and separating a rise caused by growing the loan book from one caused by rates is the first analytical step.
Worked example
A bank holds 45,000 of loans yielding 4.0% and 40,000 of deposits costing 1.0%.
Interest income is 1,800 and interest expense 400, so net interest income is 1,400. Against 45,000 of interest earning assets that is a 3.1% net interest margin.
Note there is no revenue and cost of goods sold here. Interest expense is raw material, not financing, which is why enterprise value is meaningless for a bank.