Sasha Cekerevac: One of the most eagerly anticipated sectors to watch during this earnings season is bank stocks (NYSEARCA:XLF) 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 (NYSE: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.(...)Click here to continue reading the original ETFDailyNews.com article: Why It’s Crucial To Watch Bank StocksYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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