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Net Interest Spread

Net interest spread is the difference between the interest rate a financial institution earns on its assets, such as loans and investments, and the interest rate it pays on its liabilities, such as deposits or borrowings. This spread is a key profitability metric for banks and other financial institutions, as it measures the difference between income generated from lending and the cost of funds. A wider spread indicates higher profitability.

Example

If a bank earns an average interest rate of 5% on its loans and pays an average of 2% on deposits, the net interest spread is 3%.

Key points

• The difference between the interest earned on assets and the interest paid on liabilities.

• A key measure of profitability for financial institutions.

• A wider spread means more income relative to the cost of funds.

Quick Answers to Curious Questions

It’s the difference between the interest rate earned on assets and the interest rate paid on liabilities by a financial institution.

It helps measure a bank’s profitability by showing the difference between its lending income and borrowing costs.

If lending rates increase faster than borrowing costs, the spread widens, improving profitability.

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