Charting Banking (Part II): Net Interest Margins

 |  Includes: KBE, KRE
by: PlanMaestro

Net Interest Margin (NIM) = (Interest Income – Interest Expense) / Earning Assets

In simple terms, what does a bank do? It borrows money to lend out. That historically has been its main income source until recently, when fees became important. The net interest margin therefore is a very important metric, equivalent to the cost of production of a commodity producer. You will see in the chart below (click to enlarge) several banks that Buffet (NYSE:BRK.A) has had for a long time with very high NIMs, starting with Wells Fargo (NYSE:WFC) of course.

With the interest spread becoming more favorable, the net interest margin of several institutions has been expanding. For several of the represented banks, the NIM is higher than 3%, a position that brings them close to the times when they used to be able to borrow at 3%, lend at 6% and be in the golf course by 3. The old 363 rule, from the times when there was no significant fee income.

Not all bank institutions (Banco Popular (POP)) are in that expanding NIM sweet spot yet since their non accrual assets, very closely related to non performing assets NPAs, can be a drag in the interest income. But NPAs do not even need to improve to start having a positive effect in NIMs, they just need to stabilize.

Disclosure: No position