Net interest spread refers to the difference in borrowing and lending rates of
financial institution
Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial inst ...
s (such as banks) in nominal terms. It is considered analogous to the
gross margin
Gross margin is the difference between revenue and cost of goods sold (COGS), divided by revenue. Gross margin is expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold (e. g. producti ...
of non-financial companies.
Net interest spread is expressed as interest yield on earning assets (any asset, such as a
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...
, that generates
interest income
Passive income is unearned income that is acquired automatically with minimal labor to earn or maintain. It is often combined with another source of income, such as a side job. In the United States, the IRS divides income into three categories ...
) minus
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
s paid on borrowed funds.
Net interest spread is similar to
net interest margin; net interest spread expresses the nominal average difference between borrowing and lending rates, without compensating for the fact that the amount of earning assets and borrowed funds may be different.
Example
For example, a bank has average loans to customers of $100, and earns gross interest income of $6. The interest yield is 6/100 = 6%. A bank takes deposits from customers and pays 1% to those customers. The bank lends its customers money at 6%. The bank's net interest spread is 5%.
References
Successful Bank Asset/Liability Management: A Guide to the Future Beyond Gap, John W. Bitner, Robert A. Goddard, 1992, p. 185.
Net Interest Spread Software
There are several popular commercial net interest spread software packages to help banks manage and grow their net interest spread effectively. Among these are:
Margin Maximizer Suite- this software was originally developed by US Banking Alliance which was later purchased by ProfitStars - a Jack Henry Company. This software is coupled with an onsite consulting service. The software is installed onsite and is a Microsoft .Net-based application that must be installed on each lender's computer.
PrecisionLender (formerly MarginPro)- an entirely web-based solution, launched in October 2009. It was developed by the original team from US Banking Alliance. It is delivered through Software as a Service (SaaS).
Austin Associates LLC- another web based commercial loan pricing solution. Unlik
PrecisionLender it is a more traditional html web-forms-based application.
See also
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Net interest margin
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Net Interest Income
Financial ratios
Banking
Interest