What's the spread between yield and cost of funds?
№ 107 · Net interest margin
Definition
MetricNet interest income as a percentage of average earning assets
Unit% net interest margin, annualised
Single line of (interest earned minus interest paid) divided by average earning assets. Pull from finance system. Banks live or die here. Compression signals funding costs rising faster than loan yields. Example: 5.2% yield - 1.8% funding cost = 3.4% NIM.
- NIM
- Net interest margin. Interest earned minus interest paid, divided by interest-earning assets.
Benchmarks
| Bottom 30% | Median | Top 30% |
|---|---|---|
| Below 2.5%, typical of securities-heavy balance sheets or books funded with rate-sensitive wholesale deposits | 3.3% to 3.4%, the US insured-institution industry level in the second half of 2025 | Above 4.0% for a deposit-funded lender, and materially above that for consumer-credit-led fintechs whose asset yield is unsecured card or personal loan rather than mortgage and securities |
Net interest income divided by average earning assets, annualised. US FDIC-insured institutions of all sizes, Q2 2025 to Q4 2025, plus euro area lending and deposit rates as at February 2026 for the European reference spread. · The FDIC series is the right benchmark only for balance-sheet lenders. A fintech that originates and sells, or that lends through a partner bank, has no NIM in the FDIC sense and should not be compared against 3.39%. The euro area gross spread is a different construction again: 3.97% on floating-rate loans to sole proprietors against 0.52% on overnight corporate deposits gives a gross spread near 345 bps, but that is before credit losses, funding mix and operating cost, so it sits well above any achievable NIM. Consumer-credit-led fintechs run far above bank averages because the asset side is unsecured; no Tier 1 source publishes a comparable fintech NIM distribution, so the top30 band above is directional rather than surveyed. Read this chart alongside card 109, because a high NIM bought with a high charge-off rate is not margin.
Category split omitted: The FDIC reports that NIM rose across all five asset-size cohorts but does not publish the per-cohort levels in the accessible release, and no second independent Tier 1 or Tier 2 source publishes a comparable fintech NIM split.
When it looks bad
The asset yield line and the cost of funds line converge from opposite directions, so the shaded spread between them narrows quarter by quarter even while both lines move in the direction the treasury team wanted.
Asset yield falls from 11.8% to 10.9% as the loan book shifts to better credit, while cost of funds climbs from 3.1% to 4.4% chasing deposit growth. NIM compresses from 8.7% to 6.5% in three quarters, and the book grew 40% into a thinner spread.
What to do about it
- Separate the deposit book into rate-shopping and relationship balances and price them differently, because a single headline rate pays the full price to balances that would have stayed anyway. The US industry ran NIM at 3.39% in Q4 2025 while deposits grew for a sixth consecutive quarter, which shows the two are not in necessary conflict (FDIC Q4 2025).
- Report risk-adjusted NIM, that is NIM less annualised net charge-offs, as the headline rather than NIM itself. On US credit card books that adjustment is currently about 4.1 points, which is large enough to reverse the ranking between two portfolios (FRED CORCCACBS, Q4 2025).
- Push non-interest revenue per customer so the business is not a pure rate bet. Nubank held cost to serve at USD 0.80 per active customer per month against USD 15.0 of monthly ARPAC, and that operating leverage is what allows a lender to survive a spread compression cycle (Nu Holdings Q4 2025).
- Run the rate-down scenario on both sides of the spread, not just the asset side. Deposit costs reprice more slowly than asset yields in a falling-rate environment, which flatters NIM briefly and then reverses, so a plan built on the flattered quarter will miss.
Sources
- Federal Deposit Insurance Corporation Industry net interest margin improved to 3.39% in Q4 2025, with net interest income up USD 39.6bn or 5.7% for the full year. fdic.gov ↗
- Federal Deposit Insurance Corporation Industry NIM rose 9 bps to 3.34% in Q3 2025, above the pre-pandemic average of 3.25%, and increased across all five asset-size cohorts. fdic.gov ↗
- Federal Deposit Insurance Corporation Industry NIM was effectively flat at 3.26% in Q2 2025, one basis point above the prior quarter. fdic.gov ↗
- Federal Deposit Insurance Corporation Q1 2026 ROA of 1.26% on aggregate net income of USD 80.5bn, following full-year 2025 net income of USD 295.6bn. fdic.gov ↗
- European Central Bank Overnight corporate deposit rates at 0.52% and corporate term deposits up to one year at 1.90% in February 2026, against floating-rate corporate loans over EUR 1m at 3.20%. ecb.europa.eu ↗
- European Central Bank Floating-rate loans to sole proprietors and unincorporated partnerships at 3.97% in January 2026 against 0.52% on overnight corporate deposits, an implied gross spread near 345 bps. ecb.europa.eu ↗
- Trading Economics, from European Central Bank data The ECB deposit facility rate was held at 2.00% through the March 2026 decision, with the marginal lending rate at 2.40%. tradingeconomics.com ↗
- Nu Holdings (Nubank) ARPAC of USD 15.0 and cost to serve of USD 0.80 per active customer per month, with an efficiency ratio of 19.9% and ROE of 33%; 15 to 90 day NPL declined to 4.1%. international.nubank.com.br ↗
- Board of Governors of the Federal Reserve System, via FRED Annualised net charge-off rate across all loan categories of 0.58% in Q4 2025, down from 0.65% a year earlier. fred.stlouisfed.org ↗