NIM (Net Interest Margin) is a central concept in a bank’s internal financial calculations and profitability. In our other blog in the series, we explain NIM on a more introductory level. If you’ve just landed on this topic, we suggest starting with that article: How to Calculate NIM. For a more in-depth take on NIM Attribution, continue reading below.
What is NIM?
Starting with a brief refresher, NIM is the difference (in dollar terms) between the interest generated by a bank and the interest paid out.
Banks earn interest from loans they provide (mortgages, business loans, etc.). Banks then pay interest on deposits (savings accounts, term deposits, current accounts).
NIM is the spread between those two.
What is NIM Attribution?
NIM attribution is the process or exercise of analysing changes in the number over time and assessing why it went up or down. More specifically, this process is known as decomposing changes into their underlying drivers. It involves breaking down NIM movements into components that can be easily tracked, explained, and managed.
A Decomposition Framework
A standard division might look at the following effects:
- Rate Effect: How much of the change in NIM is due to movements in interest rates on a given product.
- Volume/Share Effect: How much of the change is explained by balance sheet growth (or shifts in asset/liability mix).
- Mix Effect: How much is due to changes in the composition of the balance sheet between high-yield and low-yield categories.
Changes in NIM can be broadly attributed to one, or a combination, of the above categories.
Breaking down NIM across the bank: Product and Customer
Once the decomposition framework is established, it can be applied across key dimensions of the business, for example, product or customer.
On the product dimension, NIM may be segmented by loan or deposit type, for example comparing the margin contribution of fixed-rate mortgages versus variable-rate business loans, or term deposits versus current accounts.
On the customer dimension, NIM may be allocated across segments, such as retail versus commercial clients, or high-value versus standard account holders.
The value in attribution
Breaking NIM down by department or product transforms it from a bank-wide figure into a granular map of where margin is being created, lost, or at risk. This helps executives and decision-makers understand not only what has changed, but also where in the business it happened.
The process of decomposing these changes is a useful exercise. If major structural shifts are underway, they will be reflected in this analysis.
If Federal Reserve interest rates are cut, this will impact the rate effect. Meanwhile, if the bank is expanding market share, changes will be apparent in the volume effect. As a result, if the bank issues new bonds to the capital market, the mix effect will shift toward another product.
NIM: Focus on what matters?
This is a theoretical overview of Net Interest Margin, and it’s possible to dive even deeper into the complexities of NIM, but the principle at the heart of NIM attribution is focusing on what matters.
Management guru Peter Drucker’s line on “doing the right things, rather than just doing things right” is important to consider here. A NIM attribution exercise or mindset is one that raises the question, “Are we focusing on the right things?”. Just like focusing on cost allocation in any organization, the value of thinking big picture through a structured process can bring enormous benefit to an organization.