UBS Capital Boost From Swiss Reforms Is Feasible, SNB Says

(Bloomberg) — UBS Group AG should be able to meet any new capital requirements arising from the Swiss government’s recent reform proposals without tapping shareholders or unduly curtailing investor payouts, according to the Swiss National Bank. 

In its annual financial stability review published Thursday, the central bank said that the measures aimed at strengthening the resilience of the bank to potential losses at its foreign units are “the best solution” to ensuring robust capitalization. 

Switzerland earlier this month unveiled proposals that could require UBS to hold as much as $26 billion in extra capital, though they’re subject to parliamentary debate and come with a phase-in time that could stretch to most of the next decade.

“Based on the bank’s current capital situation, its own profitability guidance, capital repatriations and other mitigating measures, as well as the proposed phase-in period, the required capital increase will be feasible,” the SNB said in the report. “Raising capital from shareholders or excessively reducing distributions does not seem necessary.”

UBS executives including Chief Executive Officer Sergio Ermotti have argued that the proposed capital measures will put the bank at a disadvantage to its global peers, given that using more equity to fund a bank can be more expensive. The lender has even considered moving its headquarters out of Switzerland.

The Swiss central bank in its report addressed the competitiveness claim, saying that the bank would not be an outlier among large, global banks, but rather be “among the best capitalized” instead of in the middle of the pack. 

“For equity investors, more capital tends to lower the return on equity but, at the same time, the returns for the shareholders will be more stable, mitigating the negative impact on valuation,” the SNB said. “For debt investors and depositors, high capital ratios are attractive, as their claims become more secure.”

Elsewhere in the report, the central bank assessed potential risks building up in the country’s real estate market, and warned that the current environment of falling interest rates might contribute to further risk taking and an increase in vulnerability. 

The SNB has repeatedly flagged financial stability risks from the high valuations for Swiss real estate. Prices are as much as 40% above what fundamentals justify, the central bank said last year. Finma has said that it considers uncertainties from real estate and the mortgages on banks’ books to be among the principal risks in Swiss finance.

Turning to potential risks outside the banking system, such as in investment firms, pension funds and insurers, the SNB said that this sector is subject to increasing international attention due to the rapid growth in assets since the last financial crisis. 

The central bank said that more work is needed to understand the profile of such firms and better predict the risks that can emerge.

“Future work should be directed at the identification and assessment of the economic importance of NBFIs, their risk profile – with a focus on liquidity risk and leverage – and their interconnection with the banking sector.”

–With assistance from Bastian Benrath-Wright.

(Updates with further details)

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