UBS reportedly faces $20B capital hit under proposed Swiss reforms

UBS Group faces an increase in regulatory capital requirements that could reach around $20 billion under reforms proposed in the wake of the collapse of Credit Suisse.

Swiss Finance Minister Karin Keller-Sutter is aiming for systematically important lenders to have full capital backing against their foreign units, according to a person familiar with the matter. For UBS, the changes would likely translate into a capital hit in the middle of the $15 billion to $25 billion range that analysts and media have estimated, the person said, asking not to be identified discussing internal deliberations.

UBS shares fell as much as 4% in Zurich, having dropped more than 6% last week as investors digested the proposals. A spokesperson for UBS — which reported common equity tier 1 capital of $79 billion at the end of 2023 — declined to comment. 

The Federal Council wants systemically important Swiss banks to hold significantly more capital against their foreign units, while bank-specific capital levels should be boosted to take future risks more into account. The proposals would see UBS face a “substantial” increase in regulatory capital requirements, the government said last week. 

“Under the currently applicable requirements, the UBS parent bank must provide 60% capital backing for participations in a foreign subsidiary,” the government said when it unveiled its proposal. “The Federal Council is aiming for a significant increase in this capital backing,” leading to a substantial increase in overall requirements, it said.

Swiss newspaper Handelszeitung has reported the possibility of a $25 billion hit while Autonomous Research analyst Stef Stalmann has said that additional capital requirements in the $10 billion to $15 billion range could dent expectations for share buybacks.

At the end of 2023, UBS’s CET1 ratio, a key measure of financial strength, was 14.5% and its CET1 leverage ratio was 4.7%. Both were above its guidance of about 14% and more than 4.0% respectively.

Keller-Sutter told Tages-Anzeiger that a hit in the range of $15 billion to $25 billion was “plausible.” Regardless of the nominal sum, she prefers a backing for foreign subsidiaries that’s closer to 100%, the person said. 

The government can make changes in the capital regime without further parliamentary approval. The implementation of the relevant ordinance would take place in 2026 at the earliest, according to a government official.  

Stalmann at Autonomous noted that the proposed time frame for the reforms would create heightened uncertainty around capital planning and payout prospects. UBS said this month that it would buy back up to $2 billion of its shares over the next two years.

UBS executives have already spoken out against the need for more capital. Chairman Colm Kelleher argued against higher capital requirements, in an interview with the Neue Zürcher Zeitung last month. 

“If you have too much capital, you penalize the shareholders, but also the clients, because banking services become more expensive,” he said. “We already have capital buffers that are well above the regulatory minimum.”

The proposals are part of a sweeping response to Switzerland’s most severe financial crisis in over a decade, addressing a weakness that helped accelerate Credit Suisse’s demise last year.