Nim Pressure and Banks

a)For the past six years Australian Banks have claimed increasing pressure on their net interest margins due to a rise in funding costs and increased holdings of liquid assets (RBA, 2012).

Net interest margin defined as a ratio of annualized net interest income (interest income - less interest expense) over average earning assets is a quantitative measure of the return on a bank’s investment (Hanweck & Ryu, 2005). It indicates how funding expenses are managed by banks in conjunction with the management of earning assets, and more importantly loans (Hanweck & Ryu, 2005). Williams (2007) states net interest margins are an important analysing tool when assessing bank performance and further believes understanding the factors that determine net interest margins are important to all those concerned with the well-being of the financial system.

Recent events such as the Global financial crisis and European debt crisis have seen variations in net interest margin for Australian and European banks such as WBK, NAB, ANZ, CBA and the Royal Bank of Scotland. By analysing and comparing the two major components of interest income and interest expense justifications can be made of the changing net interest margins that have resulted (graph 1)

Interest Income

According to Williams (2007) Interest income makes up over 80% of a commercial Banks total interest incomes. From year the years 2006-2011 there have been significant variations in the net interest incomes of the major four Australian banks and the royal bank of Scotland, all that have contributed to

RBA, (2012). The Australian Financial System Review. Accessed via www.rba.gov.au on 19/8/2012

Hanweck, G. Ryu, L (2005). The Sensitivity of Bank Net Interest Margins and Profitability to

Credit, Interest-Rate, and Term-Structure Shocks Across Bank Product Specializations Finance

School of Management George Mason University, Working paper 2005 part 2.

Williams, B (2007) Factors Determining Net Interest...