2024-02-10 10:42:32
The negative stock market reaction to the annual figures shows that investors cannot do their math without Swiss politics.
10.02.2024, 11:4210.02.2024, 14:33
Daniel Zulauf / ch media
“Many people mistakenly think that Credit Suisse was given to us as a gift,” UBS boss Sergio Ermotti said this week to the “Corriere del Ticino”, the newspaper in his home canton.
The manager backed up his statement with a simple and entirely plausible calculation: Back then, in March 2023, a purchase price of around $3.2 billion was agreed upon. Without the deal, UBS might have been able to report a profit of $7.6 billion, as it did last year.
The capital regulations are an important factor in the UBS story, which President Colm Kelleher (l.) and CEO Sergio Ermotti want to make attractive to their investors.Image: keystone
But UBS had to use most of its profits to cover Credit Suisse’s losses. Losses that would still occur in the current year and beyond. SIn other words, it might also be said that Credit Suisse has cost UBS not $3.2 billion so far, but around $11 billion.
Who is in debt to whom?
The deal has long since been made, but the discussion regarding the purchase price remains relevant. The question is whether Switzerland should be grateful to UBS for helping the country avoid the disgrace of a massive bank failure – or conversely, whether UBS owes Switzerland something because it made the once-in-a-century business possible.
A reliable answer to the question will only be possible in a few years. Then when UBS has digested the spoils and can distribute the profits to its shareholders. The negative stock market reaction to the annual results now presented by UBS shows that investors are becoming more cautious once more following the initial euphoria in autumn.
The elephant in the room is the future capital resources of the big bank. It is in principle clear that the minimum requirements for UBS will increase. The law requires systemically important banks to hold more capital than other banks in order to be more resilient to unexpected losses. The following applies: the larger the market share for loans and customer deposits, the more capital is needed.
UBS itself expects the risk-weighted ratio of core capital to increase by around 2 percentage points to the current minimum requirement of 10.6 percent in the next few years. The core capital basically consists of paid-up share capital and retained earnings and therefore enjoys a reputation for high quality.
However, the CS crisis in particular has shown that the definition of core capital also has “some weaknesses,” as the Swiss National Bank noted in its financial stability report in the summer of 2023 with reference to various examples.
The core capital ratio currently reported by UBS is 14.5 percent, and the bank plans to keep this at around 14 percent in the long term in view of the expected increase. In the fall, Sergio Ermotti said at an investor conference that a surcharge over the minimum requirement of around 1.5 percentage points was in line with the competition.
In fact, UBS’s current capitalization is roughly in the middle compared to its international competitors (see graphic). Politicians will decide in the next few years whether and to what extent UBS needs to further increase its capital provisions.
Image: ch media
A report from the Federal Council is eagerly awaited at the beginning of April, which will evaluate the current “too big to fail” regulation and contain recommendations for reforms. The report will serve as a basis for the government to make concrete proposals for revising the banking law. It is based on various expert opinions, including an analysis by the “Bank Stability” expert group chaired by economics professor Yvan Lengwiler from the University of Basel on the “need for reform following the collapse of Credit Suisse”, as well as a report by Professor Manuel Ammann from the university St. Gallen. Both reports were commissioned by the Federal Department of Finance.
The experts don’t agree
The two reports come to different conclusions regarding UBS’s equity capitalization and thus make it clear how much scope there is in the political debate and how high the uncertainty can still become for UBS shareholders.
There is a demand for an unweighted equity ratio of 15 percent for major global banks, which former National Councilor Prisca Birrer-Heimo (SP Lucerne) submitted in June 2021. In its response following the summer holidays, the Federal Council saw “no reason to massively increase the current capital requirements for systemically important banks”. The measures to strengthen the resilience of systemically important banks were significantly increased following the financial crisis in 2008.
Two months following the emergency takeover of the CS, the National Council – presumably still in shock – approved the Birrer-Heimo motion. The unweighted capital ratio is a simpler calibration measure than the weighted core capital ratio. It relates the core capital plus certain subordinated bonds that can be allocated to core capital (AT1) to the balance sheet total.
This capital is intended to help a bank avoid bankruptcy and survive restructuring in the event of a crisis. UBS currently has $93 billion of this, which corresponds to 5.5 percent of total assets (leverage ratio). UBS might achieve the 15 percent quota required by Birrer-Heimo by tripling its going concern capital to $279 billion or by reducing total assets from the current $1,718 billion to $622 billion. An interim solution would also be possible.
Farewell to the global stage
It is clear that UBS would have to bury its ambitions as a “global player” in the banking business with such tightening. The bank would still be more than twice as big as its nearest competitor in Switzerland, the Raiffeisen Group, but would no longer even be half as big as Deutsche Bank, for example.
It cannot be assumed that such a turning point can find a political majority in Switzerland, especially since the country would have to pay for the financial stability it has gained with a significant loss of jobs and tax revenue.
Of course, UBS management would also vigorously defend itself once morest such a curtailment on behalf of its shareholders. It would argue that with such a capital requirement it would no longer be internationally competitive at all and would also be forced to massively restrict the granting of loans to companies and private individuals in the home market.
Such arguments are weighty, but at least from a scientific perspective they are not sacrosanct. Professor Ammann writes in his report, citing important sources in the international scientific literature, that stricter capital requirements would not significantly increase banks’ financing costs – if at all. However, the findings on lending are less positive.
A Danaer gift for UBS shareholders?
Nonetheless: “A moderate but substantial further increase in capital requirements” should remain part of the revised “too big to fail” regulation, recommends Ammann. A minimum leverage ratio of around 10 percent might be considered a medium-term target for the largest systemically important banks, according to the report. Such a requirement would also be a horror scenario for UBS. Share buybacks and generous dividend payments, such as those the bank has just announced, would no longer be possible for years to come.
However, the UBS management will have noted with great satisfaction that the banking stability expert group found “no obvious arguments” in the course of the CS crisis to generally quantitatively tighten the capital requirements in Switzerland. “In addition, if at all, any tightening should focus on risk-weighted assets.” An increase in the leverage ratio, as approved by the National Council in May 2023, would reduce banks’ incentive to promote safe investments and would create more of an incentive to pursue risky projects.
Even among experts, there is a wide range of opinions regarding UBS’s optimal capital base. But one thing is clear: the bank’s balance sheet total is more than twice as high as Switzerland’s gross domestic product. The risks for taxpayers are high and became more than clearly visible in the Credit Suisse crisis. The UBS management knows that the country is forced to act. Their shareholders also know this, some of whom are currently wondering whether Credit Suisse was perhaps a gift from Dana. (aargauerzeitung.ch)
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