What is Net Interest Income?

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Net interest income refers to the difference between the interest income obtained from lending and deposit businesses and the interest expenses paid. Net interest income is one of the main sources of income for banks and other financial institutions, and it reflects the efficiency of fund utilization and profitability of financial institutions.

Definition

Net interest income refers to the difference between the interest income earned by financial institutions from their lending and deposit activities and the interest costs they pay. It is one of the main sources of income for banks and other financial institutions, reflecting their efficiency in fund utilization and profitability.

Origin

The concept of net interest income developed with the evolution of modern banking. In the late 19th and early 20th centuries, as banking operations expanded and financial markets matured, banks began systematically recording and analyzing their interest income and expenses to assess profitability and risk management capabilities.

Categories and Features

Net interest income can be categorized into fixed-rate and variable-rate. Fixed-rate net interest income remains constant over the term of the loans and deposits, suitable for markets with low interest rate volatility. Variable-rate net interest income adjusts with market interest rate changes, suitable for markets with high interest rate volatility. The advantage of fixed-rate is stability, while variable-rate offers the potential for higher returns.

Case Studies

Case 1: Bank of America, after the 2008 financial crisis, successfully increased its net interest income by adjusting its interest rate strategy for loans and deposits. By increasing the proportion of variable-rate loans, Bank of America gained higher interest income in a rising interest rate environment. Case 2: HSBC, in the early 2010s, improved its net interest income by optimizing its balance sheet structure, reducing the proportion of low-yield assets. HSBC increased high-yield loans and reduced low-yield deposits, enhancing overall fund utilization efficiency.

Common Issues

Investors often overlook the impact of interest rate risk and credit risk when analyzing net interest income. Interest rate risk can lead to instability in net interest income, while credit risk can result in loan losses, affecting the actual returns of net interest income. Additionally, investors should be aware of the seasonal fluctuations in net interest income and the impact of market competition.

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Zero-Rated Goods

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Zero-Floor Limit

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Zero-Floor Limit

The term "zero-floor limit" refers to a policy whereby merchants are required to obtain authorization for every transaction processed at their store, regardless of its size. By contrast, some stores only require authorization for transactions that are above a certain size, with that size threshold being known as the store's floor limit.

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Lisbon Treaty

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Labor Intensive

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Fast-moving consumer goods (FMCGs) are products that sell quickly at relatively low cost. FMCGs have a short shelf life because of high consumer demand (e.g., soft drinks and confections) or because they are perishable (e.g., meat, dairy products, and baked goods).They are bought often, consumed rapidly, priced low, and sold in large quantities. They also have a high turnover on store shelves. The largest FMCG companies by revenue are among the best known, such as Nestle SA. (NSRGY) ($99.32 billion in 2023 earnings) and PepsiCo Inc. (PEP) ($91.47 billion). From the 1980s up to the early 2010s, the FMCG sector was a paradigm of stable and impressive growth; annual revenue was consistently around 9% in the first decade of this century, with returns on invested capital (ROIC) at 22%.

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