Breakingviews - How UBS and Switzerland can come to terms

Reuters

18-06-2025

LONDON, June 18 (Reuters Breakingviews) - Switzerland is at a crossroads. Two years ago, politicians bent over backwards to help UBS (UBSG.S), opens new tab buy Credit Suisse, partly on the grounds that a failure would imperil the Alpine nation's status as banking hub. In 2025, the same leaders are calling for an extra $24 billion of equity from the enlarged giant, which could erode Zurich's status in another way by prompting UBS to take its $1.5 trillion balance sheet elsewhere. Yet a compromise, to stop the twin extremes of UBS moving or a ruinous bank bailout, looks within reach.
Finance Minister Karin Keller-Sutter in 2023 controversially gave UBS significant sweeteners for the Credit Suisse deal, including a government loss guarantee, which Chair Colm Kelleher ultimately didn't need. Now, she wants, opens new tab the bank to fully deduct the value of foreign subsidiaries from the parent bank's common equity Tier 1 (CET1) capital.
Keller-Sutter has grounds to insist on unusually high capital ratios. UBS's assets dwarf Switzerland's $950 billion GDP. It also has a large U.S. business, which arguably makes it prudent to have enough equity to withstand any writedowns to overseas operations. The current rules, along with other more bank-specific carveouts, meant that Credit Suisse's capital ratios were more fragile than they seemed in the runup to its rescue, undermining its ability to sort out a perennially loss-making investment bank. It's possible, at least in theory, that something similar could happen to UBS one day.
Still, Kelleher and his CEO Sergio Ermotti can legitimately say that the new rules make their bank much less appealing to investors. The government's wider package of measures will by 2030 create a de facto 17.2% minimum CET1 ratio for the listed holding company, compared with 14% absent the planned changes, using UBS's estimates. That erodes returns. In May, before the government released its proposals, analysts expected $11.9 billion of annual earnings and $76 billion of regulatory capital by the end of 2027, implying a 15.7% return on CET1. Raising the capital level to 17.2% would shrink the result to 13.7%. Morgan Stanley's (MS.N), opens new tab equivalent return that year will exceed 19%, according to Breakingviews calculations using Visible Alpha data.
What happens next is down to lawmakers in Switzerland's parliament, who will decide whether to approve the rules, or water them down. That process runs slowly. UBS may not decisively know their thinking until the end of 2026.
One consideration is whether the bank is exaggerating the pain of the hit. Stock analysts reckon there are several billion dollars of spare capital in UBS's foreign subsidiaries. Keller-Sutter's number crunchers say the bank can shrink the de facto CET1 minimum below 15% through measures such as so-called repatriation, which involves pulling money out of the overseas units to shrink the capital required to back them. That lower number is close to Morgan Stanley and JPMorgan's (JPM.N), opens new tab CET1 levels, the government points out. Another possibility doing the rounds in Zurich is that UBS could use more leverage at its listed holding company to offset the capital trapped lower down in the corporate hierarchy. Finally, a six-to-eight-year transition period dilutes the intensity of the capital pain now.
Ermotti and Kelleher have some strong possible counter-arguments, though. It would be perverse to partially solve a leverage issue at one set of subsidiaries by borrowing more at another level. Moreover, the government's international comparison mixes apples and oranges. Keller-Sutter's team benchmarks UBS's requirements against the 15% to 16% levels of Morgan Stanley and other American rivals, which are tangibly higher than what U.S. regulators order them to hold. Morgan Stanley's actual regulatory minimum is 13.5%. The basic fact is that UBS could have a meaningfully lower minimum equity ratio, and therefore higher returns and even share price, if it was based elsewhere.
Those numbers add weight to an implicit threat: UBS could move its headquarters to New York or London if parliament sides with the government. The bank's growth opportunities are predominantly outside Switzerland. The planned rules make U.S. expansion costly, in capital terms. It's not a stretch to imagine that Kelleher, a former Morgan Stanley executive, would prioritise global expansion over local loyalties. If his old shop or JPMorgan lobbed in a bid, offering another way to switch domicile, he might listen.
Switching HQ could create a meaningful tax bill under local laws and raise questions about whether UBS's additional Tier 1 (AT1) debt would be eligible under U.S. regulations. The bank also could lose any clients who like the fact that UBS is neither American nor British. Yet the conservative lawmakers, which currently constitute the biggest grouping in parliament, will also be acutely aware of the risk of going from having two globally relevant banks a few years ago to none. That could represent a big blow in a country where banking accounts, opens new tab for 5% of GDP.
Yet the biggest reason a compromise is possible is that there are ways to fudge the Keller-Sutter plan while retaining its essence. Allowing UBS to cover the foreign subsidiaries' value with AT1 capital as well as CET1, for example, would still arguably protect the parent bank's equity. Letting all outstanding AT1s count for these purposes could cut the CET1 ask to just $5 billion rather than $24 billion, JPMorgan analysts have calculated.
That might be too small for comfort, but lawmakers could in theory split the difference by saying that AT1s can cover 20% of the capital, with CET1 accounting for the rest. Doing so would imply $15 billion of extra CET1, or about two-thirds of the current ask, and imply a 15% de facto minimum requirement according to Breakingviews calculations.
It might not be a satisfying outcome for capital purists, particularly after the controversial Credit Suisse AT1 writedown tainted the funky hybrid securities, but Swiss supervisors are already working to make those securities absorb losses more readily in a crisis.
Kelleher and Ermotti have some leverage by virtue of the possible HQ move, but time is not on their side. UBS faces 18 months or more of capital uncertainty and its shares, off 20% since late January, could fall further if investors get jittery. Lawmakers preoccupied with avoiding a future bank failure, in contrast, will want to take their time. Yet they should remember that while Credit Suisse's rickety capital structure didn't help, it ultimately went bust because wealthy clients mistrusted its ropey business model. As such, hitting UBS's returns carries risks as well as rewards.
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