Government demands for the bank to set aside more capital shouldn\u2019t threaten its share buyback plans.<\/p>\n
The big question for UBS Group AG shareholders is how badly its share buyback promises will be knocked by the Swiss government\u2019s desire to pursue higher capital requirements. The answer isn\u2019t clear yet, but the truth might be: Not much.<\/p>\n
Chief Executive Officer Sergio Ermotti said during UBS\u2019s first-quarter results on Tuesday that the bank itself was in the dark and hadn\u2019t been consulted on the government\u2019s thinking, leaving some uncertainty hanging over its longer term goals. But in the here and now, UBS is seeing fine progress. Results for the first three months put the bank well on course to beat its targets for integrating Credit Suisse and returning capital to investors this year. The shares rose 10% in morning trading.<\/p>\n
UBS\u2019s rescue takeover of Credit Suisse last spring has inflated its balance sheet to more than double Switzerland\u2019s gross domestic product. The government is worried it\u2019s way too big to fail and that the country\u2019s financial watchdog doesn\u2019t have enough powers \u2014 or resources \u2014 to oversee it properly. UBS supports many of the regulatory changes being proposed, but not the demands for increased capital that the government is apparently leaning toward. These new requirements haven\u2019t been detailed, but Finance Minister Karin Keller-Sutter has said that an extra $15 billion to $25 billion was plausible.<\/p>\n
Ermotti repeated UBS\u2019s mantra that it was Credit Suisse\u2019s unsustainable lossmaking business model, rather than overly-easy capital requirements, that ruined its former rival. He also said that the enlarged group was already increasing its capital by nearly $20 billion as part of the takeover.<\/p>\n
This number isn\u2019t as hard and fast as it might seem, however. About half of it is already in UBS\u2019s current, more-than-ample capital ratio and should be reduced later, while the other half won\u2019t start being applied until 2026 and won\u2019t be fully required until 2030. The impact on its payout capacity then looks minimal.<\/p>\n
To explain briefly, the first roughly $9 billion relates to the previous under-capitalization of Credit Suisse subsidiaries. UBS has a more conservative approach for the calculations involved, so has already met the higher capital levels it needs for these. But this shouldn\u2019t last because one of UBS\u2019s key objectives this year is to simplify the enlarged bank by slashing the number of different legal entities it\u2019s acquired around the world. That means fewer units that must be separately capitalized in the first place.<\/p>\n
The full $20 billion that Ermotti referenced is also already baked into its aims and forecasts and so shouldn\u2019t affect its target of paying out more than $7.3 billion in buybacks and dividends in 2026. The bank also isn\u2019t too worried about the potential for stress tests to be used to add an extra chunk of what the government called forward-looking capital in its announcements last month.<\/p>\n
The plans outlined by the Swiss government so far could mean that Keller-Sutter\u2019s plausible additions more or less match with Ermotti\u2019s number. What UBS is worried about is an even stricter treatment of foreign subsidiaries than Switzerland had previously proposed. There\u2019s a reasonable chance that the government could turn round and say its demand for more capital have been satisfied.<\/p>\n
UBS wants to move the debate away from equity capital alone and onto the full amount of loss absorbing capital the bank already has, including CoCo bonds and senior debt that are designed to be zeroed in the event of a major crisis. Together, these three forms of capital amount to $197 billion, or slightly more than 12% of its entire balance sheet.<\/p>\n
That seems like a lot, but there are legitimate questions as to whether regulators would be able to write off the senior loss-absorbing debt in particular in the event that UBS was sunk by a major crisis. The pain caused to the owners of this debt might mean taxpayers end up footing some of the bill after all \u2013 this has happened before with more junior debt in previous failures elsewhere.<\/p>\n
Ultimately, the main objective should be avoiding this question arising in the first place. That\u2019s why the strengthening of the powers and culture of oversight at the main financial watchdog, rather than how UBS treats its overseas units in its accounts, is the more important change that Switzerland needs to get right.<\/p>\n