UBS Standoff With Switzerland Escalates as Reforms Shape Up
(Bloomberg) — Swiss banking is a discreet, tight-knit world. UBS Group AG’s increasingly fiery clash with its own government is a very different affair.
The standoff entered a new phase on Wednesday as Bern submitted a bill to parliament calling for full capital backing of UBS’s foreign unit. The whole package was “extreme” and some of the government’s analysis may even have been “misleading,” the bank said in a statement. It vowed to continue to lobby against the measures as the focus now shifts to the legislative process.
Finance Minister Karin Keller-Sutter, the tenacious technocrat who is fronting the government’s push, was similarly combative, dismissing the criticism and labeling the planned measures as “bearable” for UBS despite government estimates they will add $20 billion to the bank’s capital requirements.
“Those who take risk must be liable,” she said, warning she’d look to reverse some of the other concessions she had made if the foreign units push gets watered down.
It prolongs a public standoff between Bern and UBS that’s been years in the making. The Swiss government says forcing the bank to hold much higher capital levels at home is a crucial prerequisite for financial stability and an indispensable protection for the national economy.
UBS, which feels it is being punished for the government-designed rescue of Credit Suisse, says the reforms are inappropriate for the intended purpose and instead damage UBS’s business model and, by extension, Switzerland.
The lender’s shares fell as much as 3.9% in Zurich on Thursday despite the government also presenting an executive order that was softer than its previous proposal. UBS now estimates that part of the rules will shave $4 billion from its CET1 capital, a core measure of capital strength, compared with its earlier projections of $11 billion.
That concession did little to bring the two sides closer together with UBS and the government continuing to disagree over the overall expected impact of all the measures on the bank’s capital requirements. Bern said that they would lead to a pro-forma CET1 ratio of 15.5% based on last year’s balance sheet, a level comparable with “international peers.”
UBS projected a CET1 ratio of 17.6%, dismissing the government’s estimate and saying it needs “further clarification.”
Wednesday confirmed that UBS’s lobbying had failed to persuade Keller-Sutter that less radical reforms would be enough to ensure taxpayers aren’t on the hook for another Credit Suisse-style emergency bailout.
She stressed on Wednesday that her main focus is the Swiss taxpayer who shouldn’t bear the risk of UBS’s US expansion. She dismissed concerns that the regulatory package would be a burden for shareholders, saying robust capital buffers are a competitive advantage.
Parliament will start discussing the foreign units bill on May 4 behind closed doors. UBS will be hoping to secure tangible concessions from the country’s lawmakers with some analysts warning UBS might need to exit certain overseas businesses otherwise.
“The new capital rules will make it increasingly difficult to compete,” Citi analysts noted. “This could force UBS to partially withdraw from certain international product segments over time, such as DCM, Rates & Credit, structured derivatives.”
Among lawmakers there are signs of greater sympathy towards UBS. The country’s strongest party — the Swiss People’s Party, or SVP — had previously criticized the bill as too harsh, though some parties on the left are advocating for even stricter measures.
A decision by the government to soften the ordinance would likely increase the SVP’s willingness to seek fewer changes, if any, to the foreign units bill once it’s going through parliament, Thomas Matter, an influential delegate of the party, has indicated.
Costly Expansion
The prospect of higher capital requirements has long weighed on UBS’s share price as investor fret over a potential hit to payouts. The need to hold more capital for its operations abroad would likely also make it more costly for UBS to grow internationally while it’s expanding in the US.
“By ‘bearable’ the government may mean ‘being able to raise the capital,’” said Andreas Ita from Orbit36, a consulting firm specializing in capital management. But permanently holding $20 billion of equity is unproductive and “since the bank cannot generate a return on it, the market values it with a discount.”
Keller-Sutter acknowledged that her reforms would make such growth more expensive for UBS, noting that the lender’s businesses abroad are the biggest risk for Switzerland anyway.
As UBS gets ready for at least another year of lobbying, it said it will also “continue to evaluate appropriate measures to protect the interest of its shareholders.” Options theoretically on the table range from the dramatic — a merger or acquisition deal with a non-Swiss bank allowing a change in domicile and escape from the oncoming rules — to the more mundane, such as a range of technical tweaks that can put just enough capital away over the coming years.
Last year, Bloomberg reported that the bank was evaluating shifting its headquarters in response to the oncoming capital increase. The lender has repeatedly said it wants to remain Swiss, but it has never explicitly ruled out the option.
Keller-Sutter dismissed the possibility, saying during the press conference she sees no reason why it would ever leave.
(Adds market discount in fifth last paragraph.)
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