Net interest spread
What is net interest spread?
It's the difference between the average yield a financial institution gets from loans and other interest-accruing activities and the average rate it pays out on deposits. The net interest spread is an important indicator of a financial institution's profitability.
Where have you heard about net interest spread?
Publicly traded banks usually report their interest rate spreads in their regular disclosures.
What you need to know about net interest spread.
As an example of the simple calculation involved, if a bank earns a weighted-average interest rate of 5% on its assets and pays a weighted-average interest rate of 3% on its liabilities, its net interest rate spread would be 2%.
Broadly speaking, the greater the net interest spread, the more profitable the financial institution is likely to be. The lower the spread, the less profitable - and potentially more lossmaking - it's likely to be.
When interest rates change, the interest a bank receives on its assets and pays on its liabilities fluctuates and can decrease income. So it's important to monitor changes in net interest rate spreads as well as the size of those spreads.
Find out more about net interest spread.
Check out our guide to interest rates to find out more about how they affect lenders and investors.