Net interest margin

Net interest margin is net interest income divided by average interest earning assets. It is the core profitability measure for a commercial bank, in the way gross margin is for a manufacturer.

When policy rates rise, asset yields reprice quickly if loans are floating rate, while deposit rates typically lag. That gap widens the margin, and how much of the rise the bank keeps depends on its deposit beta.

A bank funded by sticky retail deposits keeps more of a rate rise than one funded in wholesale markets, which is why deposit franchise quality is such a focus in bank analysis.

The relationship does not run indefinitely. Rates high enough to stress borrowers raise credit losses, so margin expansion eventually gets offset by impairments, which is why bank equities do not simply track rates upward.