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// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Net Interest Margin and the Repricing Gap

What a bank earns between its two sides, and which side moves first.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Net interest margin is what a bank earns on its loans and other interest-bearing assets less what it pays for deposits and borrowings, expressed against those assets: a bank earning 6.0% on US$10bn of assets and paying 3.5% on the US$9bn that funds them has net interest income of US$285m and a margin of 2.85%. It moves when rates change faster on one side than the other, and the repricing gap — the assets and liabilities that reprice within a year — says which. This page works both numbers, and the deposit beta that decides how much of a rate rise a bank keeps.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WORK THE SUM

Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.

Open The Number →

// 01 — THE MARGIN, IN PLAIN TERMS

A commercial bank earns most of its money in the gap between what it charges on loans and what it pays for the deposits and borrowings that fund them. Net interest income is that gap in dollars; net interest margin is the same gap against the assets that earn it:

Net interest income = interest earned − interest paid
Net interest margin = net interest income ÷ average interest-earning assets

Everything else a bank does — fees, trading, the cost of branches and people, the loans that go bad — sits around this engine. The glossary entry defines it; this page works it, and then the question underneath it: what happens to the margin when rates move.

// 02 — THE EXAMPLE

A bank — constructed for this page — holds US$10bn of loans and other interest-earning assets yielding 6.0% on average. They are funded by US$9bn of deposits and borrowings costing 3.5% on average, and US$1bn of the bank's own capital, which costs no interest.

Interest earned = 6.0% × 10,000 = US$600m
Interest paid = 3.5% × 9,000 = US$315m
Net interest income = US$285m
Net interest margin = 285 ÷ 10,000 = 2.85%

Note that the margin is wider than the 2.5-point spread between the two rates, because a tenth of the assets are funded by capital that pays nothing. That is one of the ways capital earns its keep, and one of the reasons a bank with more of it can price a little lower.

// 03 — THE REPRICING GAP, AND WHICH SIDE MOVES FIRST

Now let market rates rise by one point. The margin does not move by one point on both sides at once; it moves by however much of each side reprices, and when. Suppose US$4bn of the assets reset within a year — floating-rate business loans — while the other US$6bn are fixed for longer; and US$7bn of the funding resets within a year, because most deposits can be repriced at any time.

One-year repricing gap = assets repricing − liabilities repricing = 4,000 − 7,000 = −US$3bn
If every repricing item moves the full point:
earned +1% × 4,000 = +US$40m
paid +1% × 7,000 = −US$70m
net interest income −US$30m (the bank is liability-sensitive)

A negative gap means a rate rise reaches the bank's costs before its income. But deposits do not all move the full point. If the bank passes on half of the rise to its depositors — a deposit beta of 0.5 — the sum changes sign:

paid +1% × 0.5 × 7,000 = −US$35m
net interest income +40 − 35 = +US$5m

The whole forecast turns on that one behavioural number, which is why a reader of a bank watches what it pays savers as closely as what it charges borrowers — and why a bank that has written fixed-rate loans against floating deposits has taken a position whether it meant to or not.

WORK IT · DURATION AND VALUE → · THE REPRICING GAP, THE CALL → · DEPOSIT BETA, WHAT THEY HEAR →

// 04 — WHERE IT REACHES THE LENDING DESK

A relationship manager who agrees a five-year fixed rate for a borrower has, from the bank's side, written a fixed-rate asset against floating funding — the mismatch in Issue 06's Groundwork file on price — and the bank either carries that position or hedges it with a swap. The borrower's side of that choice and the swap that fixes it are the same mechanism seen from across the table.

FIXED-RATE ASSETS, FLOATING FUNDING → · HOW BANKS WORK → · MATURITY TRANSFORMATION, DEFINED →

// STANDARDS THIS SITS BESIDE

The recognised ground this page sits beside. Each was opened and checked when cited; none is a source for the framework itself.

  1. Basel Committee on Banking Supervision, Interest rate risk in the banking book (April 2016) — Gap risk comes from the timing of rate changes across a bank's assets and liabilities, and banks are expected to measure it through earnings, as the change in net interest income, as well as through economic value — the repricing gap in section 03.
  2. Basel Committee on Banking Supervision, Principles for Sound Liquidity Risk Management and Supervision (September 2008) — paragraph 1 — Banks transform short-term deposits into long-term loans — the funding on one side of the margin and the assets on the other, section 01.

// QUESTIONS PEOPLE ASK

What is a good net interest margin?
None in the abstract. A bank lending to small businesses on floating rates against cheap transaction deposits runs a wider margin than one lending to large companies against wholesale funding, and both can be well run. The margin is read against the bank's own model and its own history, and against what it costs the bank to run that model — a wide margin on a book that loses money to bad loans is not strength. The movement matters more than the level.
Why do rising rates help some banks and hurt others?
Because of which side reprices first. A bank whose loans are mostly floating and whose deposits reprice slowly earns more the moment rates rise; a bank that has written fixed-rate loans funded by deposits that follow the market pays more before it earns more. The repricing gap — the assets and liabilities that reset within a year, netted — is the simplest way to see which kind of bank you are reading, and the deposit beta decides how much of the theoretical effect arrives.
What is deposit beta?
The share of a change in market rates that a bank passes on to its depositors. A beta of 0.5 means a one-point rise in rates lifts what the bank pays on those deposits by half a point. Transaction accounts that pay nothing have a beta near zero; term deposits and wholesale funding have betas near one. It is the number that turns a repricing gap into an earnings forecast, and the one that moves most when depositors start paying attention.
Is net interest margin the same as the margin on my loan?
No. The margin on a business loan is the spread over a base rate that one borrower pays, set by that borrower's risk. Net interest margin is the bank's whole book: everything it earns on every asset less everything it pays on every deposit and borrowing, against the assets. A borrower's margin is one input to it; the deposit side, which the borrower never sees, is the other half.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE NUMBER · THE BANK · RATE SENSITIVITY

A bank holds US$10bn of fixed-rate loans with an average duration of four years. Market rates rise by one percentage point.

Roughly how much value have the loans lost?

1 FILES · PICK A CALL ON ANY OF THEM

4 MORE ON THE BANK · RATE SENSITIVITY →WHERE DO YOU READ FROM? THE PLACEMENT →