Thread by @VROStocks

Key metric to measure bank stocks.

A thread 🧵⬇️

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As an investor, you want to pick the most profitable bank to invest in.
Net Interest Margin helps you assess the profitability of a bank.

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Net Interest Margin tells us how much money a bank is earning in relation to its interest-earning assets, i.e., loans.

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Suppose Bank ABC gave out loans worth Rs 10,000 crore and earned 10 % interest on them, i.e., Rs 1,000 crore.
However, it had to pay Rs 500 crore as interest to the depositors.

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Net Interest Margin is a better gauge of profitability than Net Interest Income because it shows the bank's ability to get better returns from its investments, i.e., loans.

Higher the Net Interest Margin, the more profitable the bank is likely to be.

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For example:

Bank XYZ earned Rs 500 crore as Net Interest Income just like Bank ABC. However, to earn that Rs 500 crore, it had to give out loans worth Rs 20,000 crore.

Thus, its Net Interest Margin is 2.5% (Rs 500 crore/Rs 20,000 crore).

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So, despite having the same Net Interest Income, Bank ABC is more profitable than Bank XYZ, as reflected in its higher Net Interest Margin.

So if you are stuck between 2 banks and want to pick the more profitable one, focus on their Net Interest Margins.

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Case in point:

Despite having the highest Net Interest Income in the industry in FY22, SBI finished 19th in the Net Interest Margin rankings.

Kotak Mahindra Bank had the highest Net Interest Margin in the industry but was 9th in the Net Interest Income charts.

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