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Valyooo (34.52)

Why aren't net interest margins higher?



October 31, 2013 – Comments (3)

If deposits or capital cost a bank 3%, and they lend it out for 4%....the NIM should NOT be 1%. They are paying 3% on the desposits, and then they are lending for 4%....but they are lending 5-10 times leveraged. So 5x leverage on 4% loans is 20% minus the 3% capital requirements, NIM should be 17%....this is all of course before building and employee expenses etc

What am I missing?

3 Comments – Post Your Own

#1) On October 31, 2013 at 7:16 PM, TMFValueMagnet (88.05) wrote:

Valyooo - NIM is calculated before leverage. If you pay 3% on assets, lend at 4%, then your net interest margin should be 1%.


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#2) On October 31, 2013 at 7:46 PM, constructive (99.97) wrote:

The relative size of interest earning assets and interest bearing liabilities in your example is not realistic. It's not 5 - 10x, it's closer to 1x. Net interest margin involves the real cost of interest on deposits and borrowings. I think you may be confusing it with the more intangible concept of cost of equity. 

If you take PKBK as an example, they earned $37.7M interest last year on $736M loans and securities (5.1%). And they paid out interest of $7.4M on $615M deposits and borrowings (1.2%). Net interest margin = (interest earned - interest paid) / interest earning assets = 4.1%  (PDF page 40 and 43)

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#3) On October 31, 2013 at 8:12 PM, Valyooo (34.52) wrote:

"t's not 5 - 10x, it's closer to 1x"


Wouldn;t that imply that banks use no leverage?


Also I think I just figured it out....banks leverage up, but their leverage also creates deposits, and they pay interest on those deposits 

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