Swiss government proposes tough new capital rules in major blow to UBS

The Swiss authorities on Friday proposed strict new capital guidelines that will require banking big UBS to carry a further $26 billion in core capital, following its 2023 takeover of stricken rival Credit score Suisse.

The measures would additionally imply that UBS might want to absolutely capitalize its international items and doubtlessly perform fewer share buybacks.

“The rise within the going-concern requirement must be met with as much as USD 26 billion of CET1 capital, to permit the AT1 bond holdings to be lowered by round USD 8 billion,” the federal government stated in a Friday assertion, referring to UBS’ holding of Extra Tier 1 (AT1) bonds.

The measures subsequently quantity to a further $26 billion in core capital however a requirement of simply $18 billion in new capital. That is $2 billion decrease than the $20 billion estimated by JP Morgan earlier this week.

UBS shares jumped 6% following the announcement and ended Friday’s buying and selling session 3.8% larger.

The Swiss financial institution will turn into extra secure and enticing in areas resembling asset administration, Swiss Finance Minister Karin Keller-Sutter stated throughout a press briefing on Friday. “I do not imagine that the competitiveness might be impaired, however it’s true that progress overseas will turn into costlier,” she stated in feedback reported by Reuters.

UBS stated whereas it helps “in precept” many of the regulatory proposals introduced on Friday, it strongly disagrees with the “excessive” enhance in capital necessities. Based mostly on the financial institution’s first-quarter outcomes, its CET1 capital ratio goal of between 12.5% and 13% — together with beforehand communicated capital — the agency stated it could be required to carry round $42 billion in further CET1 capital in complete.

The financial institution maintained its goal of attaining an underlying return on CET1 capital of round 15% and likewise reaffirmed its capital return intentions for the yr.

“UBS will actively have interaction within the session course of with all related stakeholders and contribute to evaluating options and efficient options that result in regulatory change proposals with an inexpensive value/profit final result. UBS may also consider applicable measures, if and the place doable, to handle the unfavorable results that excessive laws would have on its shareholders,” the financial institution stated.

Johann Scholtz, senior fairness analyst at Morningstar, famous that the information was “as unhealthy as it’s going to get for UBS.”

The banking big “can now foyer for some concessions and take some actions themselves to mitigate impression, as an example upstream some extra capital from its subsidiaries,” Scholtz stated. He added that whereas negotiations will begin instantly, there might be a long-phase out for UBS to deploy the measures, with the earliest that it’s going to apply in full being 2034.

JPMorgan analysts led by Kian Abouhossein additionally confused {that a} lengthy lead time of six to eight years for UBS to fulfil the deduction of investments in its international items is a “constructive” final result for the financial institution. With finalization anticipated round 2027, JPMorgan expects full implementation by 2033 on the earliest.

UBS is anticipated to generate round $12 billion [per annum] in earnings with a dividend of about $3 billion, which implies the financial institution can “fulfill its ‘capital hole’ by 2033+ and nonetheless proceed with buybacks,” the analysts stated.

The Swiss Nationwide Financial institution stated it supported the measures from the federal government as they’ll “considerably strengthen” UBS’ resilience.

“In addition to lowering the probability of a big systemically vital financial institution resembling UBS entering into monetary misery, this measure additionally will increase a financial institution’s room for manoeuvre to stabilise itself in a disaster by its personal efforts. This makes it much less doubtless that UBS needs to be bailed out by the federal government within the occasion of a disaster,” SNB stated in a Friday assertion.

UBS has been battling the specter of tighter capital guidelines since buying the nation’s second-largest financial institution at a cut-price following years of strategic errors, mismanagement and scandals at Credit score Suisse.

The shock demise of the banking big additionally introduced Swiss monetary regulator FINMA below hearth for its perceived scarce supervision of the financial institution and the final word timing of its intervention.

Swiss regulators argue that UBS will need to have stronger capital necessities to safeguard the nationwide economic system and monetary system, given the financial institution’s stability topped $1.7 trillion in 2023, roughly double the projected Swiss financial output of final yr. UBS insists it’s not “too huge to fail” and that the extra capital necessities — set to empty its money liquidity — will impression the financial institution’s competitiveness.

On the coronary heart of the standoff are urgent issues over UBS’ potential to buffer any potential losses at its international items, the place it has, till now, had the responsibility to again 60% of capital with capital on the dad or mum financial institution.

Increased capital necessities can whittle down a financial institution’s stability sheet and credit score provide by bolstering a lender’s funding prices and choking off their willingness to lend — in addition to waning their urge for food for danger. For shareholders, of notice would be the potential impression on discretionary funds obtainable for distribution, together with dividends, share buybacks and bonus funds.

“Whereas winding down Credit score Suisse’s legacy companies ought to release capital and scale back prices for UBS, a lot of those features might be absorbed by stricter regulatory calls for,” Johann Scholtz, senior fairness analyst at Morningstar, stated in a notice previous the FINMA announcement. 

“Such measures might place UBS’s capital necessities nicely above these confronted by rivals in america, placing stress on returns and lowering prospects for narrowing its long-term valuation hole. Even its long-standing premium ranking relative to the European banking sector has not too long ago evaporated.”

The prospect of stringent Swiss capital guidelines and UBS’ intensive U.S. presence by its core international wealth administration division comes as White Home commerce tariffs already weigh on the financial institution’s fortunes. In a dramatic twist, the financial institution misplaced its crown as continental Europe’s most precious lender by market capitalization to Spanish big Santander in mid-April.

– CNBC’s Ganesh Rao contributed to this report.