Price Action of the Bank Stocks Indicates Changing U.S. Economic Landscape

One of the most eagerly anticipated sectors to watch during this earnings season is bank stocks and how they are dealing with the shift in interest rates and the impact on the housing market.

Obviously, it’s crucial to watch bank stocks since they can give us information about the health or direction of the economy in general. Take Wells Fargo & Company WFC, for example; the company is the largest lender in the housing market, and its latest third-quarter financial results are quite interesting.

As I have been saying for most of this year, higher interest rates will be coming, and this will lower expected revenue in the housing market division. Wells Fargo has just validated this forecast by reporting significantly lower levels of mortgage origination, which includes both home purchases and refinancing.

Wells Fargo reported a 43% year-over-year decline in mortgage banking income, at $1.61 billion for the quarter. Total mortgage originations, which include refinancing, dropped 42% year-over-year to $80.0 billion for the latest quarter. (Source: “Wells Fargo Reports Record Quarterly Net Income,” Wells Fargo & Company web site, October 11, 2013.)

With higher interest rates, the housing market is indeed feeling the pinch, and bank stocks need to dramatically shift their business structure into higher growth areas. Wells Fargo is one of the leading bank stocks in America, and it’s trying to move away from the housing market-related business into both the retail side of banking, as well as business loans.

In these sectors, things are certainly better for bank stocks than the housing market. Net income from the retail banking division was $3.34 billion, up 22% from last year. Total loans were up 3.8% to $812 billion from the year-ago quarter, with strength in commercial and industrial loans up 7.6% year-over-year.

This is the transition that bank stocks need to make, moving from generating revenue income in the housing market to the traditional lines of business of retail banking and initiating loans for commercial and industrial purposes.

Of the many bank stocks out there, Wells Fargo is at least trying to improve its overall business structure to take advantage of the shift out of profits in the housing market and into the traditional business segments.

With Wells Fargo reducing 5,300 positions in the slowing mortgage division, the company needs to continue this aggressive downsizing of its housing market business areas, capturing revenues from the bank stocks that are not fast enough to adapt to the changes in the economy.

As an investor in bank stocks, you need to look at a stock’s management to determine they are able to rapidly shift the stock’s assets and allocate them to business segments where the potential to generate revenues is highest.

Obviously, even with the significant setback in the housing market business segments, Wells Fargo is still an incredibly strong bank, with net income of $5.58 billion for the third quarter, up 13% year-over-year.

For you to best determine which bank stocks to invest in over the next five to 10 years, looking at how the management team deals with adversity and changes to the business is crucial.

Over the next few weeks, when you’re taking a look at the earnings releases from various bank stocks, notice how they are dealing with the changes in the housing market.

If firms are strictly focused on the housing market, then this could be a sign that these bank stocks should be avoided. Conversely, if other bank stocks are looking at growing their business outside of the housing market, then perhaps one should consider investing in these firms.

The economic landscape is changing in America; companies need to adjust in order to thrive.

This article Price Action of the Bank Stocks Indicates Changing U.S. Economic Landscape was originally published at Investment Contrarians