Bank MetricsNIM
Net interest margin (NIM) is a bank’s interest income minus interest expense, relative to its earning assets. CET1 is the ratio of a bank’s highest-quality capital to its risk-weighted assets. The liquidity coverage ratio (LCR) checks that a bank holds enough liquid assets for 30 days of stressed outflows; the net stable funding ratio (NSFR) checks its funding over one year.
Banks are analysed with their own toolkit. Net interest margin shows how profitably a bank lends, capital ratios show how much loss it can absorb, and liquidity ratios show whether it can survive a run on Liquidity.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Bank KPIs, Bank financial ratios, Banking ratios
- Updated
Bank metrics in plain words
Net interest margin is what a bank earns on loans and other interest-bearing assets minus what it pays depositors and lenders, shown as a percentage of its average earning assets.1
The Liquidity Coverage Ratio requires banks to hold enough easy-to-sell, high-quality assets to cover their cash needs through 30 days of stress.2
Capital is measured mainly as Common Equity Tier 1 (CET1) relative to risk-weighted assets. Rules differ by country even where Basel standards are adopted.
How to analyse a bank
Start with profitability
Work out net interest margin: interest earned minus interest paid, divided by average earning assets.1
Check efficiency
Compare costs with revenue to see how lean the bank is.
Check capital
Check the CET1 ratio and the buffers on top of the minimum, such as the capital conservation buffer.3
Check short-term liquidity
The LCR covers a 30 calendar day liquidity stress scenario.2
Check funding stability
Look at the Net Stable Funding Ratio, which checks that long-term activities are backed by stable funding.4
Review asset quality
Look at bad loans, provisions and Default Risk in the loan book.
Worked examples
Example 1 — Net interest margin
NIM 3.0%A hypothetical bank earns $500M interest, pays $200M and has $10B average earning assets.
| Net interest | $300M |
| Earning assets | $10B |
| NIM | 3.0% |
Net interest divided by average earning assets gives the margin shown.1
Example 2 — LCR
LCR 120%A hypothetical bank has $12B HQLA and $10B of stressed outflows over 30 days.
| HQLA | $12B |
| Net outflows | $10B |
| LCR | 120% |
A ratio above 100% means the bank's liquid assets would cover a 30-day stress period.2
Example 3 — CET1 ratio
CET1 12%A hypothetical bank has $6B CET1 and $50B risk-weighted assets.
| CET1 | $6B |
| RWA | $50B |
| CET1 ratio | 12% |
Capital above the minimum matters, because the conservation buffer is meant to absorb losses before limits bite.3
Key bank metrics
| Aspect | What it measures | Watch for |
|---|---|---|
| NIM | Lending profitability | Squeeze when rates fall |
| CET1 ratio | Loss-absorbing capital | Falling toward minimums |
| LCR | 30-day liquidity | Below 100% |
| NSFR | Stable funding | Reliance on short-term funding |
Who uses bank metrics
Equity investors
Compare banks on NIM and returns.
Bond investors
Judge Credit Spread and Default Risk.
Counterparties
Assess Counterparty Risk before trading.
Macro analysts
Track how Interest Rate changes hit bank profits.
Advantages and disadvantages
Advantages
- Standardised ratios allow comparison.
- Regulatory disclosures are detailed.
- Liquidity ratios flag run risk.
- Capital ratios show loss absorption.
Disadvantages
- Risk weights can hide risk.
- Ratios are snapshots that can change fast.
- Definitions differ by country.
- Complex for beginners.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why NIM matters
Beginner
Most bank income comes from interest. The FDIC's NIM measures that spread as a percentage of average earning assets.1
Liquidity rules
Intermediate
The LCR focuses on surviving a short, sharp stress with a cushion of unencumbered liquid assets.2
Stable funding
Advanced
The NSFR aims to stop a funding shock from draining a bank's liquidity.4 It looks over a one-year horizon.
Common mistakes
Using non-bank ratios
Debt-to-equity means little for banks.
Ignoring rates
NIM moves with the rate cycle.
Trusting one ratio
Combine capital, liquidity and asset quality.
Comparing across countries blindly
Rules differ by country.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- NIM measures lending profitability.
- CET1 measures loss-absorbing capital.
- LCR covers a 30-day liquidity stress.
- NSFR targets stable funding.
- Rules differ by country.
Frequently asked questions
What is a good NIM?
Is a higher CET1 always better?
Do all countries use LCR and NSFR?
Further learning
- Liquidity
Why funding matters.
- Interest Rate
The driver of NIM.
- Default Risk
Loan losses.
- Leverage
How banks are funded.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- FDIC. 2024 Risk Review – Glossary of Terms (opens in a new tab) Checked .
- Bank for International Settlements (Basel Committee). Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (opens in a new tab) Checked .
- European Central Bank. Glossary (C) (opens in a new tab) Checked .
- Bank for International Settlements (Basel Committee). Basel III: the net stable funding ratio (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.