Here’s why a Bank Stock’s Net Interest Margin is important and which Big 4 Bank Stocks have the highest!

Investors focused on the banking and financials sectors will commonly hear the term Net Interest Margin (NIM). In this article, we recap what it is, why it is important and which big bank stocks have the highest NIMs.

What is the Net Interest Margin?

Net Interest Margins (NIMs) refer to the difference between the interest income earned by a bank or financial institution and the interest paid out to its depositors. In other words, it is the gross profit margin that a financial institution makes on its lending activities.

Banks and other financial institutions earn income by charging interest on loans and other investments. They pay interest to depositors as an incentive for them to keep their money with the bank. The difference between the interest earned and the interest paid out is what determines the NIM.

Why are NIMs important?

NIMs are an important metric for banks and other financial institutions as they reflect the profitability of their lending activities. A higher NIM indicates that a bank is earning more on its lending activities, and is therefore more profitable.

NIMs are affected by a number of factors, including the interest rate environment, the level of competition in the market, and the type of loans and investments offered by the bank.

For example, in a low-interest rate environment, it may be more difficult for banks to earn a high NIM, as the interest rates on their loans are lower. In addition, different types of loans and investments have different NIMs. For example, loans to riskier borrowers may have higher interest rates, but may also carry a higher risk of default, which can lower the NIM.

With interest rates higher, are NIMs rising too?

Usually they do, but not necessarily, for a few reasons. First, because of the higher interest rates the banks have to pay to deposit holders. And secondly, the competition amongst the banks is strong as customers refinance en-masse. Banks have to offer incentives, such as cashbacks to get customers across the line or just to prevent existing customers from switching.

There is a reason why the term ‘Mortgage Wars‘ was being used. Namely, the intense competition between the banks to keep and retain existing customers as well as to obtain new ones, measures that sacrificed potential benefits to the NIM.

Which banks have the highest NIM?

Among the Big Four Banks, CBA had the highest at 2.04% during 1HY26. Turning to the others, NAB’s was 1.71%, Westpac’s was 1.79% and ANZ was 1.56%. Of course, some of these have subsidiaries that may have higher or lower NIMs – there are too many of them to delve into here.

CBA has long had the highest NIM and this reflects its strong retail deposit franchise and pricing power. ANZ has the lowest and while some may say it is a bad thing, not necessarily. Yes ANZ is behind its peers in the mortgage market but this also reflects its larger institutional banking exposure and different funding mix.

Some smaller banks have higher NIMs. Judo Bank (ASX:JDO), for instance has an NIM of almost 3%, because it specialises in high-margin business loans. Businesses pay higher interest because they can claim it as a tax deduction. Nonetheless, this has not prevented it from decline off the back of earnings misses or downgraded guidance. Across the sector, mortgage competition and higher deposit costs remain the key factors limiting NIM expansion, even as loan volumes continue to grow.

How can funding mix impact a bank’s NIM?

Well, transaction costs help NIMs because consumers pay no interest on those. Savings accounts that pay interest pay a higher cost but it is still better than term deposits or wholesale bonds. The ‘worst’ from a bank’s perspective is securitisation.

Suppose there are two banks writing mortgages at 6%. One bank funds itself with transaction deposits costing 0.5% and the other funds itself with bonds costing 3.5%. Which one will have a higher NIM? The first one by a wide margin.

NIMs are important

Overall, NIMs are an important metric for banks and financial institutions, and are closely monitored by investors and analysts. A strong NIM can indicate a strong and profitable business, while a weak NIM can be a cause for concern.

It is a metric that many investors will find intriguing to watch in the months ahead regardless of whether rate cuts happen this year, have to wait another year or (gasp) two, or if there are even one or two more rate rises coming from the RBA. Nonetheless, it is difficult to see them headed too higher from here if they couldn’t increase that substantially after all the interest rate increases.