Swiss Regulation Threatens UBS’s ‘Deal of Decade,’ Analysts Say

(Bloomberg) — UBS Group AG is handling the Credit Suisse integration so well, the acquisition would likely be seen as a big success if it wasn’t for the regulatory headwinds it has spawned, Deutsche Bank AG analysts said.

“The bank is well on track to make it the deal of the decade as the benefits of greater scale across divisions become more visible,” Benjamin Goy and Sharath Kumar said in a note this week. “However, this could be materially derailed by regulation and the new AT1 legal case.”

Since agreeing to rescue its former rival in a government-brokered deal more than two years ago, UBS has cut staff and risky clients, run down assets and moved past legacy legal cases, and consolidated its IT infrastructure. But the acquisition has also saddled Switzerland’s largest bank with new regulatory and legal challenges, most notably an effort by Switzerland to impose massive new capital requirements.

The situation was compounded by a recent court ruling that declared unlawful the decision by Swiss authorities to wipe out Credit Suisse AT1 bonds, a move intended at the time to facilitate the deal.

“While UBS largely controls the controllables, the opposite can be said about the external environment,” the Deutsche Bank analysts said in the note. The Swiss reform plans unveiled earlier meant the “worst case effectively became the base case” for UBS, while the AT1 court decision created “another potential multi-billion dollar headwind for capital,” they said.

As the tussle with Swiss politicians is likely to continue for years, some senior figures would welcome it if Chief Executive Officer Sergio Ermotti stayed beyond the guided end date for his term around the beginning of 2027, people familiar with the matter have said.

The Deutsche Bank analysts noted as bright spots that there are signs of growing political support in Switzerland for UBS. They also said the bank will respond to the Swiss plan and “optimize its group and legal entity structure to reduce the impact over time,” for example by “upstreaming” capital from its foreign units.

As for the AT1 ruling, the hardest hit to UBS would come if the bonds get reinstated on the lender’s balance sheet, the analysts said. But if that were to happen, it would be “years out” and parts of that scenario have already been priced into UBS’s shares, they said.

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