UBS Slams ‘Extreme’ $26 Billion Capital Demand in Swiss Proposal

(Bloomberg) — UBS Group AG said it would examine steps to mitigate the effects of the Swiss government’s proposal for as much as $26 billion in fresh capital requirements, calling the demand “extreme” and vowing to continue its push to dilute the regulations.

After months of uncertainty that’s weighed on the Zurich-based bank’s share price, the Swiss Federal Council said Friday that it would require UBS to back the capital in its foreign subsidiaries fully at the parent bank. The government estimates that this will force UBS to add as much as $23 billion in capital to its Swiss-based main unit, with the remainder coming from other measures.

The bank has argued that the capital measures are an overreaction to the collapse of Credit Suisse in 2023 which puts them at a disadvantage to global peers and warned it could hurt their plans for investor payouts. 

“UBS will also evaluate appropriate measures, if and where possible, to address the negative effects that extreme regulations would have on its shareholders,” UBS said in a statement late Friday. The bank confirmed previously-announced buyback plans for 2025 and added that it will decide early next year on how much it will return in 2026.

While a year-long lobbying effort by Chairman Colm Kelleher and Chief Executive Officer Sergio Ermotti essentially fell flat, there were some crumbs of comfort for investors. Following parliamentary debate, a lengthy phase-in period could see the bank given until 2035 to fully comply, while the government suggested that the measures could reduce the lender’s reliance on relatively expensive convertible debt, or AT1s, as capital.

UBS shares closed up 3.8%, having jumped as much as 7% after the government announcement.

“The shares have massively underperformed its peers and it seems that today’s proposals were priced in,” said Andreas Venditti, an analyst at Bank Vontobel AG in Zurich. Bloomberg reported the decision on foreign units in May. 

UBS can now consider steps to meet the extra requirements including repatriating capital from abroad or selling assets. Yet the bank has already mooted the much more extreme reaction of moving its headquarters abroad if the proposals ultimately materialize. 

The government justified its stance on the basis that UBS would be more resilient in a crisis, and in any case the bank has many ways to mitigate the impact of the changes. It also said that the measures could entail a reduction of about $8 billion in the use of AT1s. That would leave a need for an extra $18 billion in so-called “going concern” capital, it said.

“How high the additional capital requirement is in the end depends on many factors and to a large extent also on how UBS reacts to these measures,” Swiss Finance Minister Karin Keller-Sutter said at a press conference in Bern.

 

The proposal on foreign units means that in an emergency, UBS “should be able to dispose of foreign subsidiaries either in part or in their entirety, without this negatively impacting the capitalization of the parent bank,” the government said in a statement. “The required build-up of capital can ideally be achieved without raising capital, without excessively restricting organic growth and without excessive reduction in distributions.”

The government also unveiled a list of other measures to be drafted into ordinances and legislation, including substantial new powers for the financial regulator Finma, including the ability to fine banks.

Officials first touted the plans in April last year, a factor that has weighed on the share price. The stock has been essentially unchanged since then, while the Stoxx Europe 600 Banks index — which tracks the biggest banks in the euro area — has climbed about by more than 40%.

Details of the phase-in including its exact length and whether it will be front-loaded or linear will likely be announced in the fall when the government publishes the finalized draft of the adjusted law. It’s as of now unclear whether the decision on these details will rest with the government alone or require parliament’s approval, according to an official.

Switzerland’s leadership also presented new rules for capital quality. These will update how banks have to quantify intangible items such as deferred tax assets, in-house software and other hard-to-value items they have on their books, adding up to a potential increase of $3 billion. 

These changes are planned to be implemented via an ordinance which doesn’t require lawmakers’ sign-off. Therefore they may enter force as early as the middle of next year.

The government will now finalize the draft and propose the changes to parliament, which is expected to debate them in 2027. The new law likely won’t take effect before 2029. As UBS can lobby lawmakers, there’s a chance that the draft will be watered down. In any case, the government has proposed a phase-in period of between 6 and 8 years once the changes are agreed. 

“The phase in period is even longer than what the market expected and the AT1 offset softens the blow somewhat,” said Johann Scholtz, an analyst at Morningstar. “This is as bad as it will get for UBS from a capital perspective. From here they can lobby for concessions and look to take mitigating actions themselves, for instance upstreaming capital from over-capitalized subsidiaries.” 

–With assistance from Levin Stamm, Paula Doenecke, Allegra Catelli and Jan-Henrik Förster.

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