A new Industry Note from equity research firm Jefferies suggests that the major investment banks are finally going to get a break, as “the end of QE in the US should finally see a return of ‘good’ volatility to asset prices.”

Investment Banks

Jefferies analysts Omar Fall and colleagues authored the October 3rd report, in which they suggest that a return to greater volatility in the financial markets is likely to help European investment banks boost their FICC revenues and improve gross margins in wealth management and equity derivatives. They highlight Deutsche Bank and Credit Suisse as “plays on the theme, with valuations low enough to capture litigation and regulatory risk.”

Investment Banks

Fed taper to help investment banks

The Jefferies report suggests that the analysts community is underestimating the impact that the Fed tapering will have on the volatility of financial markets. Fall et al. point to proprietary research making it clear that “QE and forward guidance at the zero bound (in the US) have been the key drivers of the unprecedented period of low volatility. It follows that as this is wound down, volatility should recover.”

Investment Banks

They also argue that the signs of returning volatility are already evident, given the higher trading volumes over the last month or so. The Jefferies analysts say the consensus outlook for further double digit declines in FICC revenues into next year is “aggressive”, and that they forecast +7% FICC in 2015. They justify their analysis by pointing to “the Rates business as the key variable to the FICC revenue outlook.”

Investment Banks

Jefferies recommendations

In terms of their recommendations in the investment bank sector, Fall and colleagues currently have a Buy rating on Deutsche Bank AG (NYSE:DB) (ETR:DBK) with a price target of €38.20. They also rate Credit Suisse Group AG (ADR) (NYSE:CS) as a Buy and have a price target of CHF 31.30 on the stock.

The analysts note they have reduced our forecasts on DBK, UBS AG (NYSE:UBS) and CS because of higher litigation charges, but “we are still +20% ahead of consensus for Deutsche and CS  in 2016 and see significant upside to both in a more constructive environment for FICC.”

Investment Banks