UBS Faces $20 Billion Hike in Capital Needs as Swiss Split Grows

(Bloomberg) — The Swiss government outlined plans that would add billions of dollars to UBS Group AG’s capital requirements, deepening a showdown with the lender over its proposed banking reforms.

Bern stuck with a plan to submit a bill to parliament calling for the full capital backing of UBS’s foreign units on Wednesday even as it watered down other previously planned changes to the regulations. Together both sets of measures add up to an extra capital requirement of around $20 billion at the bank’s Swiss unit, according to the government.

UBS said in a statement that it “continues to strongly disagree with the proposed package, which is extreme, lacks international alignment and disregards concerns expressed by the majority of respondents to the government’s consultations. “If adopted, the proposed measures would have far-reaching consequences for the Swiss economy.”

The legislation, driven by Finance Minister Karin Keller-Sutter, requires that UBS back its foreign units with 100% capital at the parent bank, which so far has been the most controversial element for the lender. The change addresses a perceived weakness contributing to Credit Suisse’s demise, in which troubled foreign units couldn’t be sold without severely damaging the solvency of the parent bank.

The government will continue to let UBS count deferred tax assets toward its regulatory capital and to write down software from that metric over a period of three years, an easing of previous proposals.

Keller-Sutter said at a press conference following the announcement that the government is “unanimously” behind the measures and it has made significant concessions to UBS.

By offering concessions on the technical measures, the government is seeking to build political support for what it sees as an indispensable reform. A senior lawmaker has signaled that softening the ordinance could buy the government some goodwill on its broader package.

UBS said the government materials “contain assertions that we believe to be misleading” and would provide additional comments at its first quarter results next week, if not before.

The lender’s shares were little changed in Zurich, having risen as much as 2.7% ahead of the government announcement. A $1.5 billion Additional Tier 1 bond by UBS sold earlier this year jumped 1 cent on the dollar to 101.8 cents after the announcement on Wednesday.

The proposals don’t appear to go far enough to “ease investor concerns over future payout potential,” Bloomberg Intelligence analyst Philip Richards said.

The Federal Council, the Swiss National Bank and regulator Finma “are united in the view that the proposed measures are sensible, necessary, targeted and, for UBS, manageable,” the government said.

Executives including Chairman Colm Kelleher and Chief Executive Officer Sergio Ermotti have spoken extensively against the main elements. While the concessions on the ordinance give the bank’s leadership some comfort, the firm still faces a long path to finality on the reforms.

The legislative process will take at least until next year and introduces the possibility of substantial changes, also considering that UBS will have the chance to lobby lawmakers. A parliament committee is set to hold the first closed-doors debate on May 4.

UBS said it expected the parliamentary process to “take account of the concerns raised by many stakeholders,” while warning that it “will continue to evaluate appropriate measures to protect the interest of its shareholders.”

Government officials warned that should parliament water down the foreign units bill, it could revisit the compromise on deferred tax credits contained in Wednesday’s announcement.

The government’s proposed measures would result in a CET1 capital quota for the group of around 15.5% in the future following implementation, the government said, a level that’s “in line with international peers today.”

The government pushed back on UBS’s view that the measures would negatively impact the bank’s competitiveness. “In the short term, a higher return on equity can be achieved with less equity capital. In the long term, however, more equity capital ensures the bank’s stability.”

For UBS, higher capital requirements may still curb its ability to grow internationally and to make investor payouts, though the bank remains highly profitable. The firm is set to report earnings on April 29, and is expected to see net income rise to around $2.4 billion, according to estimates compiled by Bloomberg.

–With assistance from Tasos Vossos.

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