UBS Faces Swiss Exit or Stay-and-Pay as Capital Defeat Nears
(Bloomberg) — As UBS Group AG was examining the potential costs of quitting its host country, it once sought out advice from one of the few banks that managed to pull off the feat.
Some time ago, executives at the Swiss firm brought up the issue with some counterparts at Nordea Bank Abp, the Finnish bank that left Stockholm for Helsinki almost a decade ago, according to people familiar with the matter. The conversation about the pros and cons of relocation ended up doing little to tilt sentiment inside UBS toward leaving Switzerland, the people said.
UBS Chief Executive Officer Sergio Ermotti and Chairman Colm Kelleher are closing in on decision time. A vote by the parliament’s upper house last week has drastically increased the chances that Switzerland will ultimately force the bank to hold as much as $16 billion in additional equity known as CET1 capital, a move that would be a defeat for the duo and their yearslong fight against tougher rules.
That has once again raised the question of whether UBS could leave, even if the move could severely erode a business model built on its Swiss identity. The alternative for the lender would be to stay — and potentially acquiesce to new rules that Ermotti and Kelleher have criticized heavily, predicting they will render the bank uncompetitive.
Several important stakeholders are urging UBS to jump into the unknown. Investor Artisan Partners said Wednesday the “excessive, punitive and unnecessary” costs faced by UBS in Switzerland “leave it no real choice” but to quit the country. Shareholder Cevian Capital AB previously issued the same appeal.
Nordea said that “no such discussions involving Nordea’s senior executives have taken place.” It added that “the suggestion that Nordea regrets moving its headquarters to Finland does not reflect our position.”
UBS hasn’t yet given up hope it can still persuade lawmakers to water down the regulation and avoid the stark choice between leaving or losing. The firm’s status as Switzerland’s biggest bank gives it considerable political sway in a country where the banking industry plays a crucial role.
“As we have consistently stated, our goal is to continue operating successfully as a global bank from Switzerland,” UBS said in a statement in response to the Artisan appeal. It will “ protect the interests of its shareholders by continuing to contribute facts and analysis to support informed decision-making and advocating for regulation that is truly targeted,” it added.
The perceived risk of inflicting heavy damage to UBS’s business model or even driving it away, after urging the bank to buy Credit Suisse more than three years ago, is why some lawmakers are set to discuss a softer compromise. The potential plan would raise the level of required equity capital backing for foreign units to only 75%, instead of the 90% sought by the upper house. The government’s initial proposal was for 100%.
Others, including senior government officials, are convinced UBS will stay. Led by Finance Minister Karin Keller-Sutter, that camp sees the status of being Swiss as too important for the bank to relinquish and any move away as too expensive to afford.
Representatives for UBS and the government declined to comment for this story.
Least Bad Option
Keeping up the campaign for a less burdensome law might draw out the legislative process and extend the drag it has been for the bank and its share price.
Some inside UBS now see a quick end to the whole capital debate as the least bad option, people familiar with the matter said.
The parliament’s lower house will be next to debate the reform, with lawmakers preparing a recommendation at committee meetings on Oct. 26 and 27, and Nov. 23 and 24. A vote on the floor could potentially happen in December.
If the chamber adopts the same proposal as the upper house, it will become law.
If the lower house votes for something else, however, the matter would go back and forth between them, extending the timeline. Analysts are skeptical that the chamber, which is seen as less business-friendly than the upper house, will back a law that’s more favorable for UBS than the 90% rule.
There’s even the possibility of a plebiscite, which would delay a final decision even more. The Social Democrats have said they would seek to collect the 50,000 signatures needed to trigger such a move if the Swiss parliament adopts a law they see as a UBS win.
The setback in parliament has rekindled speculation that UBS may look to an overseas bank as a quick way to move its headquarters. News outlet Semafor reported last week that UBS has revived discussions about ways to leave, including through a deal with a foreign lender, and the tabloid Blick subsequently reported several international banks have signaled interest.
Some inside UBS see a combination with Morgan Stanley or another large US bank as a potentially appealing option to relocate, people familiar with the matter said. There’s no indication any party is currently pursuing a transaction.
While UBS has been keeping an eye on potential targets in the US for some time, it doesn’t have any imminent M&A plans and is waiting for more clarity on the capital debate before making any decisions, one of the people said.
A representative for Morgan Stanley declined to comment.
UBS has estimated its domestic unit would have to add around $16 billion in CET1 capital under the 90% scenario and about $20 billion under the 100% one, though it would likely have several years to accumulate that. It has rejected both measures as damaging to its business model.
The bank is set to report third-quarter results on Oct. 28, a possible platform to further respond to the proposals.
The Swiss government has put UBS’s CET1 gap at $5 billion and $9 billion, respectively, and welcomed the upper house’s decision as close enough to its original plan. It argues the tougher rules are needed to ensure that taxpayers at home aren’t on the hook for risks the bank is taking abroad.
A lower need for fresh capital would make it easier for Ermotti and Kelleher to accept the new rules, their previous opposition notwithstanding.
“As the base case is clearer now, UBS might look into finalizing mitigation plans,” RBC analysts including Anke Reingen said in a note earlier this week.
Smaller Footprint
There’s also an array of levers they can theoretically pull to cope if they stay in Switzerland.
One option would be to cut back UBS’s international footprint. That would help because the new rules are designed to force the bank to hold more capital at home for its foreign subsidiaries. While that makes it less likely that the Swiss unit would get hit if it needed to sell its businesses abroad, it also raises the costs of maintaining and growing them.
Trimming global ambitions would be a painful choice for UBS. The Swiss bank has made international growth a priority and it recently obtained a broader US banking license to underpin the effort.
Ermotti has said that “shrinking is not an option” to deal with the capital reform.
There are other ways UBS could seek to deal with the higher capital requirements, although they either have side effects or are too small to matter much.
One option is to continue moving capital from subsidiaries outside Switzerland to the domestic unit, a strategy known as “upstreaming” that has already helped. However, much of what is feasible has been done and the overall effect is not expected to be nearly enough to solve the problem.
Retaining earnings would be a more powerful way to build up equity fairly quickly as UBS reported net income of $7.8 billion for last year. But the prospect of lower dividends and share buybacks is already a key reason why the planned measures have weighed on UBS’s share price.
There is also the option of raising more equity from shareholders, but that’s likely to be seen as even less preferable by investors given the stake dilution it would entail.
–With assistance from Levin Stamm, Ruth David, Crystal Tse, Rafaela Lindeberg, Hannah Levitt, Evelina Youcefi and Sam Nagarajan.
(Adds analyst comment in 26th paragraph.)
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