Net Interest Income
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All firms can divide the balance sheet into assets and liabilities. For banks the assets are commercial and personal loans, mortgages, construction loans and securities. The liabilities are deposits from customers. The net interest income (NII) is then the difference between the revenues on the assets and the cost of servicing the liabilities. Notice that both cash flows are not interest payments. In other words, the NII is the difference between the interest payments to the bank on loans and the interest payments by the bank to the customers on the deposits.
NII = {Interest payments on assets} - {Interest payments on liablities}
Depending on the banks specific portfolio of assets and liabilities (fixed or floating rate) the banks NII can be more or less sensitive to changes in interest rates. If the banks liabilities reprice faster than its assets it is said to be liability sensitive. Further, the bank is asset sensitive if the liabilities reprice more slowly than the assets. The exposure of NII to interest rate changes can be measured by the dollar maturity gap (DMG), which is the difference between the assets that reprice and the liabilities that reprice within a period of time.
