Charting Banking II: net interest margin
by PlanMaestro
Net Interest Margin (NIM) = (Interest Income – Interest Expense) / Earning Assets
In simple terms, what a bank does? It borrows money to lend it. That has been historically 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 several banks that Buffet has had for a long time with very high NIMs, starting with Wells Fargo 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% close to the times where they could 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 BPOP) are in that expanding NIM sweetspot 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.
No Position
I think the NIM directly determines what % of NPA is life threatening. For a bank of NIM 3%, 6% NPA is life threatening. But for a credit card company like VISA, their NIM is much high, like 15%, so 6% of NPA is not a big concern. Maybe 30% NPA is life threatening to them.
Have you looked at any credit card companies? I looped through VISA, MASTERCARD, AMEX and Discovery. Looks like there is not too much Maring of safety at this point for any of those four.
You are right that good profitability gives you flexibility to manage NPAs over time. Pre-tax Pre-provision Earnings (PTPP) might be better than NIM if you want to condition it.
The problem is that it is not that easy to filter with all those conditions.
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