Net Interest Margin and Capital Ratios (Banks)
Net interest margin is what a bank earns on loans and securities minus what it pays depositors and lenders, as a percentage of earning assets. Capital ratios show whether the bank's own capital is thick enough for the risks it carries.
How to calculate it
Net interest margin = net interest income (often tax-equivalent) ÷ average earning assetsCommon equity tier 1 (CET1) ratio = CET1 capital ÷ risk-weighted assetsTier 1 leverage ratio = tier 1 capital ÷ average total assetsHow to read it
- Net interest income is the largest revenue source for most banks, so small changes in margin move earnings a lot. Margins move with interest rates across the industry, so a bank's position relative to peers matters most.
- The deposit beta, how much of a rate increase a bank passes on to depositors, explains much of the difference in margins between banks when rates move.
- Capital determines how fast a bank can grow and how much it can return. Banks close to their requirements must slow lending or cut buybacks.
Common pitfalls
- A high margin is not always good: it may come from riskier borrowers. Read it with credit quality.
- Capital requirements differ by bank. The CET1 minimum is 4.5% of risk-weighted assets, plus a stress capital buffer of at least 2.5% set by Federal Reserve stress tests for large banks, plus a surcharge for the largest global banks. A ratio that looks high may leave little room for a particular bank.
- Unrealized losses on securities held to maturity do not reduce regulatory capital for most banks, as the 2023 regional bank failures showed. Check the fair value of the securities portfolio in the notes.
Where to find it in a 10-K
Earnings releases and MD&A show net interest margin and the average balance sheet with yields and rates. The regulatory capital section of the 10-K shows CET1, tier 1 and total capital ratios versus requirements.
U.S. vs. China reporting
Chinese bank margins are shaped by policy rates such as the loan prime rate and by deposit rate guidance, and have been squeezed to historic lows. U.S. margins move more with the Federal Reserve's policy rate and with competition for deposits. Capital rules in both markets follow Basel III, but buffers and risk weights differ.