Banks: why NIM replaces EBIT
Banks earn interest as their primary product. Adding interest expense back to bridge to EBIT is incoherent because it removes the cost of the bank's raw material. Use Net Interest Margin, the efficiency ratio, and pre-provision net revenue instead[FDIC].
Why EBIT is incoherent for a bank
A bank's gross interest expense is the cost of deposits (its raw material). A bank's gross interest income is its revenue. Subtract one from the other and you get net interest income, which is the closest analogue to gross profit. Adding the expense back makes the resulting figure meaningless.
The bank metrics that replace EBIT
- Net Interest Margin (NIM): net interest income divided by average earning assets. The bank version of gross margin.
- Efficiency ratio: non-interest expense divided by (net interest income + non-interest income). The bank version of OpEx intensity.
- Pre-provision net revenue (PPNR): revenue minus non-interest expense, before loan-loss provisions. The bank version of EBIT.
When bank holdcos still use EBIT-style analysis
For the non-banking subsidiaries (insurance arms, asset management, payments). The segment disclosures in a bank-holdco 10-K usually let you compute EBIT for the non-bank segments. Do not apply EBIT to the consolidated holdco.