It is pretty clear to me, following many of the major U.S. banks' earnings releases this week, that companies such as Wells Fargo (NYSE:WFC) have completely taken advantage of the favorable lower interest rate environment.
While it's easy to see how much the banks have enjoyed their veritable interest rate heaven, Fed Chairman Alan Greenspan left these institutions thinking the other day when he left the door open for potential rate increases.
Wells Fargo announced record earnings on Tuesday, and big banks such as Bank One (NYSE:ONE), U.S. Bancorp (NYSE:USB), Bank of America (NYSE:BAC), and Washington Mutual (NYSE:WM) have all reported extremely positive results in recent months.
A quick snapshot of Wells Fargo's earnings for the first quarter tells you all you need to know about the U.S. banking industry. The company's earnings per share (EPS) rose 17% to $1.03, largely due to increased consumer business activity that offset a slight slowdown in mortgage banking.
Simply put: Banks are a busy place when interest rates make it easier for people to borrow money. This trend is highlighted by the fact that the company has reported 11 consecutive quarters of record earnings.
Banks are among the most cyclical of industries; this means that the flow of interest rates historically moves in cycles. We have been set in a favorable interest rate environment for several years, but let us not forget the other end of the cycle, during the 1980s, when Reaganomics produced interest rates that made it quite difficult for people to borrow money efficiently.
To invest in banking stocks is to keep one eye on interest rates and the other eye on the sharp pendulum swinging in the breeze. While it's true that "what goes up must come down," the opposite is also a reality.
Give your opinion on the bank industry's prospects on the Wells Fargo discussion board.
Fool contributor Phil Wohl spent over 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.
