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UBS Group Needs to Surge Capital Reserves Amid Swiss Financial Reforms
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In an interview with Neue Zuercher Zeitung (“NZZ”), Thomas Jordan, president of Swiss National Bank (“SNB”), stated that UBS Group AG (UBS - Free Report) should increase its capital reserves in preparation for upcoming regulatory changes.
Jordan further explained that these changes were considered vital to prevent any crash similar to what happened with Credit Suisse in 2023. This reform would ensure that problematic Swiss banks could be wound up or restructured without destabilizing Switzerland's financial system.
Federal Reserve takes a similar approach by requiring U.S. banks to undergo a stress test to weather any potential crash. Following the 2024 stress test result, the Fed determined the capital requirement for The PNC Financial Services Group, Inc. (PNC - Free Report) and Citizens Financial Group, Inc. (CFG - Free Report) , which were among the 31 banks to participate in the Fed’s stress test. Both PNC and CFG’s stress capital buffer requirement is 4.5%.
UBS’ Capital Position
In June 2023, UBS Group completed the acquisition of Credit Suisse (a regulatory-assisted deal). This move is expected to enhance capabilities in wealth and asset management, a benefit that became evident in the bank’s second-quarter 2024 performance. Asset Management’s operating profit before tax surged 64.6% year over year to $130 million, highlighting the positive impact of the acquisition on UBS’ financials.
As of June 30, 2024, UBS Group’s common equity tier (CET) 1 capital ratio was 14.9% and the CET1 leverage ratio was 4.9%. Management forecasts to achieve an underlying return on CET1 capital ratio of approximately 15% and 18% by 2026-end and 2028-end, respectively.
However, UBS Group has expressed significant concerns regarding the SNB's plans to require it to hold additional capital. Currently, UBS is waiting for more detailed information on the government's proposals, but it may need to secure between $15 billion and $25 billion in additional capital. These new requirements are designed to prevent a recurrence of the issues that led to the collapse of Credit Suisse.
Jordan assured NZZ that “It’s not like UBS will have to hold additional equity overnight — it would be given enough time to make adjustments. I am convinced that good capital requirements are an advantage for an internationally active bank. An important part of the overall package is strengthening the capital regime for the parent company.”
Reforms Resulting in Higher Capital Requirements for UBS
The reforms related to improving corporate governance and strengthening banks' liquidity and capital holdings are expected to strengthen the power of the banking regulator, Finma. However, these changes might take several years before they can be fully implemented.
Stefan Walter, head of Finma, has voiced his desire to acquire new powers, including the ability to interfere in banks' business models in advance of any crisis to fine and veto decisions taken by senior management.
Thomas Jordan, in his final remarks as Switzerland's central banker, emphasized three important elements that must be ensured in the banking system, including accurate capital valuation. Another is adequate capital distribution, ensuring that capital is appropriately allocated between the parent company and its subsidiaries so that decisions made during a crisis at the group level do not lead to capital shortages at the parent company. Finally, ensuring that convertible capital can be legally converted without any complications.
These measures, reflecting Switzerland's commitment to a more resilient banking sector, will take a proactive approach to regulatory oversight by strengthening governance, capital adequacy and regulatory authority to prevent systemic failures like those seen with Credit Suisse and ensure long-term stability.
Final Thoughts on the Increased Capital Requirements for UBS’ Buyout
Increased levels of capital, post the acquisition of Credit Suisse by UBS, are crucial for ensuring financial stability and mitigating risks. While the enhanced capabilities in wealth and asset management and the positive impact on UBS’ financials are clear, the need to maintain higher capital could lead to a slowing down of shareholder returns.
This potential slowdown might affect investor confidence and stock performance. Striking a balance between increased capital requirements and shareholder return will be one of the key factors for UBS as it navigates this integration and looks for a way back to longer-term stability and growth.
In the past three months, shares of UBS Group have lost 8.7% on the NYSE compared with the industry’s decline of 10%.
Image: Shutterstock
UBS Group Needs to Surge Capital Reserves Amid Swiss Financial Reforms
In an interview with Neue Zuercher Zeitung (“NZZ”), Thomas Jordan, president of Swiss National Bank (“SNB”), stated that UBS Group AG (UBS - Free Report) should increase its capital reserves in preparation for upcoming regulatory changes.
Jordan further explained that these changes were considered vital to prevent any crash similar to what happened with Credit Suisse in 2023. This reform would ensure that problematic Swiss banks could be wound up or restructured without destabilizing Switzerland's financial system.
Federal Reserve takes a similar approach by requiring U.S. banks to undergo a stress test to weather any potential crash. Following the 2024 stress test result, the Fed determined the capital requirement for The PNC Financial Services Group, Inc. (PNC - Free Report) and Citizens Financial Group, Inc. (CFG - Free Report) , which were among the 31 banks to participate in the Fed’s stress test. Both PNC and CFG’s stress capital buffer requirement is 4.5%.
UBS’ Capital Position
In June 2023, UBS Group completed the acquisition of Credit Suisse (a regulatory-assisted deal). This move is expected to enhance capabilities in wealth and asset management, a benefit that became evident in the bank’s second-quarter 2024 performance. Asset Management’s operating profit before tax surged 64.6% year over year to $130 million, highlighting the positive impact of the acquisition on UBS’ financials.
As of June 30, 2024, UBS Group’s common equity tier (CET) 1 capital ratio was 14.9% and the CET1 leverage ratio was 4.9%. Management forecasts to achieve an underlying return on CET1 capital ratio of approximately 15% and 18% by 2026-end and 2028-end, respectively.
However, UBS Group has expressed significant concerns regarding the SNB's plans to require it to hold additional capital. Currently, UBS is waiting for more detailed information on the government's proposals, but it may need to secure between $15 billion and $25 billion in additional capital. These new requirements are designed to prevent a recurrence of the issues that led to the collapse of Credit Suisse.
Jordan assured NZZ that “It’s not like UBS will have to hold additional equity overnight — it would be given enough time to make adjustments. I am convinced that good capital requirements are an advantage for an internationally active bank. An important part of the overall package is strengthening the capital regime for the parent company.”
Reforms Resulting in Higher Capital Requirements for UBS
The reforms related to improving corporate governance and strengthening banks' liquidity and capital holdings are expected to strengthen the power of the banking regulator, Finma. However, these changes might take several years before they can be fully implemented.
Stefan Walter, head of Finma, has voiced his desire to acquire new powers, including the ability to interfere in banks' business models in advance of any crisis to fine and veto decisions taken by senior management.
Thomas Jordan, in his final remarks as Switzerland's central banker, emphasized three important elements that must be ensured in the banking system, including accurate capital valuation. Another is adequate capital distribution, ensuring that capital is appropriately allocated between the parent company and its subsidiaries so that decisions made during a crisis at the group level do not lead to capital shortages at the parent company. Finally, ensuring that convertible capital can be legally converted without any complications.
These measures, reflecting Switzerland's commitment to a more resilient banking sector, will take a proactive approach to regulatory oversight by strengthening governance, capital adequacy and regulatory authority to prevent systemic failures like those seen with Credit Suisse and ensure long-term stability.
Final Thoughts on the Increased Capital Requirements for UBS’ Buyout
Increased levels of capital, post the acquisition of Credit Suisse by UBS, are crucial for ensuring financial stability and mitigating risks. While the enhanced capabilities in wealth and asset management and the positive impact on UBS’ financials are clear, the need to maintain higher capital could lead to a slowing down of shareholder returns.
This potential slowdown might affect investor confidence and stock performance. Striking a balance between increased capital requirements and shareholder return will be one of the key factors for UBS as it navigates this integration and looks for a way back to longer-term stability and growth.
In the past three months, shares of UBS Group have lost 8.7% on the NYSE compared with the industry’s decline of 10%.
Image Source: Zacks Investment Research
At present, UBS Group carries a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.