Guide · Markets
Net Interest Income: How Banks Earn Money From the Gap Between Two Rates
The biggest source of profit for most banks is simple: they pay less on deposits than they earn on loans. Here's how net interest income works, why interest rates move it, and why it dominates every bank earnings season.
A bank borrows money from its depositors and lends it out to households and companies. It pays depositors one rate and charges borrowers a higher one. The difference, added up across every deposit and every loan, is called net interest income (NII). For most commercial banks it is the single largest source of revenue, often half or more of the total.
A related measure is the net interest margin (NIM): net interest income divided by the bank's interest-earning assets. If a bank earns an average of 6% on its loans and securities and pays an average of 3% on its deposits and borrowings, its margin is roughly 3 percentage points. Small changes in that margin add up quickly. For a bank with $2 trillion of interest-earning assets, a 0.1-point change in margin is worth about $2 billion a year.
Interest rates move NII in two directions at once. When the Federal Reserve raises rates, banks can charge more on new loans and earn more on cash and short-term securities, so income tends to rise. But depositors eventually demand higher rates too, and money moves from current accounts into higher-yielding savings and money-market funds. The speed at which banks have to pass rate increases on to depositors — called the deposit beta — decides how much of the benefit they keep. When rates fall, the process runs in reverse.
That is why bank results are read so closely for NII guidance. Investors want to know how much the bank expects to earn from lending over the coming quarters, because it is the most predictable part of the business. Other revenue — investment banking fees, trading, wealth management — swings with markets. On October 13, 2026, the first day of third-quarter bank earnings, both sides mattered: Goldman Sachs, which earns mostly from trading and advisory work, rallied at the open on a 72% jump in stock-trading revenue, while Citigroup fell 5.6% as investors focused on weaker fee income and higher credit provisions despite record revenue.
Two other lines in a bank's report sit right next to NII and change how it should be read. Provisions for credit losses are money set aside for loans that may not be repaid; when they rise, part of the interest income is being eaten by expected defaults. And securities gains or losses appear when a bank sells bonds it bought when rates were lower — JPMorgan's third-quarter results, for example, included a $658 million loss on securities sales.
For anyone following bank stocks, a simple routine helps on results day: check NII against the bank's own guidance, look at the direction of credit provisions, and then compare fee-based revenue with the previous quarter. A bank can beat on earnings per share and still fall if the most reliable part of its income looks set to shrink.