Toolkit: Calculating the Net Margin

This toolkit presents a simple mechanism to calculate the net margin of a financial institution.

The net margin tool is an important component of an asset-liability management program. It provides a picture of how well the financial institution is covering its cost of funds and operating expenses with its earnings on assets. The paper states that:

• Net margin should always be positive;
• Positive net margin signals that the financial institution is generating sufficient income to cover the cost of funds paid on savings products as well as its operating expenses;
• Negative net margin means that the institution is not generating enough income to cover costs.

The measurement of yield on assets and cost of funds on liabilities can also provide managers with a tool to measure the efficiency of their financial institution and compare it with that of competitors. Managers should run the calculation of net margin regularly to monitor whether or not the institution is covering its costs, since a change in either assets or sources of funds will change the outcome.