UBS’s Swiss Capital Fight Threatens Ermotti’s Swift Victory Lap

(Bloomberg) — Sergio Ermotti should have been on the home stretch. Having returned to take charge of UBS Group AG in 2023, the executive is steering his firm through one of the biggest bank integrations in recent history after its rescue of Credit Suisse.

Yet victory is not quite in sight. The ultimate outcome of a stand-off with the Swiss government over the enlarged bank’s capital requirements is years away.

That’s putting the matter of who will take over from Ermotti — and when — in a new light. Both the bank and the CEO have guided that he’ll step down at the end of 2026 or early 2027, with a path potentially open to him later becoming chairman.

But the need to tussle with Swiss politicians over the coming years to fend off what UBS has characterized as an “extreme” $26 billion capital demand means that some senior figures would welcome Ermotti staying longer, according to people familiar with the matter.

That would ensure continuity at the top as Switzerland’s capital reform plans wind through parliament and would also give a potential successor more time to display their credentials, the people said, asking not to be named discussing preliminary and informal thinking.

A spokesperson for UBS declined to comment.

Investors have welcomed Ermotti’s success so far in pulling off the complex integration of Credit Suisse. Its stock is up about 75% since it agreed to rescue its rival with various legacy legal matters resolved and job cuts made against a backdrop of fresh inflows into the company’s wealth management operation.

Still, the mood when UBS reports third-quarter earnings on Oct. 29 is likely to be muted.

Along with the capital debate, Ermotti is likely to be grilled on a range of recent issues, including its exposure to the First Brands bankruptcy that has caught out various lenders and a recent court ruling that gave fresh hope to wiped-out Credit Suisse AT1 bondholders of a potential payout.

The First Brands episode is the second risk-management mishap in a year. In May, it emerged that some wealthy Swiss clients claimed they hadn’t understood what they were invested in when they suffered heavy losses on derivatives whose value was impacted by US President Donald Trump’s “Liberation Day” tariff announcements.

Earlier this month, a Swiss court delivered a ruling that added fresh legal uncertainty to UBS. In a surprise move, the court said Switzerland’s 2023 order to wipe out some $17 billion in AT1 convertible bonds issued by Credit Suisse was unlawful. While that decision hasn’t technically been reversed, and won’t be final for years, the ruling raises the specter of UBS being asked to contribute to undoing those losses.

Vulture funds are already circling, sensing that compensation is in the offing — whether from the government or UBS is a long way from being clear. Lawyers acting for holders of the previous Credit Suisse AT1 bonds are speculating that the ruling implies either compensating investors for the losses or reinstating the instruments.

The bank also recently shelved a risk-transfer deal in which the bank would have been able to free up the capital tied to some $2.5 billion of loans, Bloomberg has reported. With the global market for such significant risk transfers growing, UBS hasn’t yet detailed why it backed away from a transaction that would — albeit marginally — help optimize its capital structure.

Capital Question

Overshadowing all these issues is the capital question. The bank has so far seen little tangible progress in efforts to water down the government’s bid to increase capital requirements by $26 billion. A vote on the matter isn’t likely before 2027, and the matter could still need to go before a referendum.

The uncertainty has weighed down UBS shares, which have lagged other European bank stocks this year, though the bank was starting from a higher valuation. UBS has said it will only detail the 2026 buyback after fourth-quarter earnings in January.

At least one major shareholder is agitating for dramatic solutions to the bank’s regulatory stand off. Cevian, which holds about 1.4%, has said the firm will ultimately have to leave Switzerland and domicile somewhere else.

With the bank’s management in the trenches, Chairman Colm Kelleher’s ambition for a “foreseeable and credible succession with a range of candidates” looks more essential than ever. So far, Americas boss Rob Karofsky and Asia-Pacific head Iqbal Khan are seen as the internal front runners, according to people familiar with the matter.

In a sign the integration is on track, the bank reshuffled some of its leadership on Friday. Beatriz Martin will become chief operating officer, in addition to her current role as head of non-core and legacy. Chief Financial Officer Todd Tuckner will take on responsibility for governmental and regulatory affairs.

The changes position UBS to “successfully complete the integration” and “focus on growth opportunities,” Ermotti said in the statement.

–With assistance from Bastian Benrath-Wright, Ambereen Choudhury and Noele Illien.

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