Where does net interest income sit under IFRS 18? A guide for banks

Read the general guidance on IFRS 18 and you will learn that interest expense belongs in the financing category and investment income in the investing category. For a manufacturer that is exactly right. For a bank it would be absurd: it would split net interest income, the core of the bank’s performance, across two categories and leave operating profit as a figure with almost nothing in it.

IFRS 18, which replaces IAS 1 for annual periods beginning on or after 1 January 2027, does not do that. It contains a specific route for entities whose main business activities include providing financing to customers or investing in assets, and following that route correctly is the first and largest judgement a bank makes in its implementation.

The short answer#

For a bank whose main business activity is providing financing to customers, interest income on loans and advances is classified in operating. So is the interest expense on liabilities that relate to providing that financing, such as customer deposits. Net interest income therefore sits inside operating profit, where management, analysts and supervisors already expect to find it.

The assessment is about the main business activity of the reporting entity, judged on facts, not on the name of the institution. Most commercial and retail banks will meet it easily. A bank that also holds a large investment portfolio as a main business activity will classify those returns in operating as well.

The choice that decides the subtotals#

Not every liability funds customer lending directly. Senior bonds raised for general purposes, subordinated debt raised to support capital and other funding can sit at a distance from any loan.

For income and expenses on those liabilities, an entity that provides financing to customers as a main business activity has an accounting policy choice: classify them in financing, like any other company, or classify them in operating together with the rest of its interest.

The choice has a visible consequence. A bank that classifies all such interest in operating has nothing meaningful left between operating profit and the financing line, and it does not present the subtotal profit before financing and income taxes. A bank that keeps some funding costs in financing presents that subtotal, and must explain what sits below operating profit.

The most consequential decision in a bank’s IFRS 18 project is made before a single line is re-mapped.

Where the answer is not obvious#

• Treasury and trading results, including repo and reverse repo, where the link to customer financing or to investing as a main activity has to be argued.
• Derivatives used to manage risk, whose gains and losses generally follow the category of the item whose risk they manage, and derivatives that manage foreign currency exposure across several categories.
• Foreign exchange differences, which are classified in the same category as the income and expenses of the item that gave rise to them.
• Interest on lease liabilities and other liabilities that are not raised to fund lending.
• Dividends and fair-value movements on equity investments that may or may not form part of a main business activity.

Islamic banks and windows that report under IFRS face the same test with different instruments: financing income from murabaha and ijara, sukuk holdings, and profit distributed to investment account holders all have to be placed. Institutions that report only under AAOIFI standards follow AAOIFI presentation rules instead.

Group, subsidiary and separate accounts#

The main-business-activity assessment is made for each reporting entity. A banking group can reach one answer in its consolidated statements, another in the separate statements of a holding company whose own business is holding investments, and a third in a non-financial subsidiary. Each set of accounts, and each regulatory return built from them, has to be mapped on its own answer.

Which bank measures become MPMs#

Net interest income is a line item, not an MPM, and net interest margin, cost-to-income and regulatory capital and liquidity ratios are ratios, not subtotals.

But the subtotals banks quote around them often are MPMs: pre-provision operating profit, underlying or adjusted profit, and profit excluding notable items, when used in investor presentations or press releases. Each one used publicly has to be defined, reconciled to the nearest IFRS subtotal and disclosed with its tax and non-controlling-interest effects in the MPM note.

What a bank should settle now#

1. Document the main-business-activity assessment for every reporting entity in the group.
2. Make and record the accounting policy choice on funding not related to customer lending, knowing which subtotals it produces.
3. Map treasury, derivative, foreign exchange and lease items to categories, with the reasoning.
4. Inventory every performance measure in investor and board material and decide which survive as MPMs.
5. Tag the chart of accounts so that the IFRS 18 presentation and regulatory returns come from one ledger, and re-capture the 2026 comparatives.

The IFRS 18 Implementation Masterclass for Banks & Financial Institutions works through each of these decisions over two days, with an integrated case on a sample group with a conventional bank, an Islamic subsidiary and a finance company. For institutions that want the work done with them, BIZENIUS IFRS 18 Implementation advisory covers the assessment, the MPM note and the transition.