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UBS shares drop most since January as capital ratio declines

UBS Group AG fell the most in six months after the bank reported a decline in a measure of its ability to absorb losses.

[ZURICH] UBS Group AG fell the most in six months after the bank reported a decline in a measure of its ability to absorb losses.

The shares fell as much as 4.3 per cent - the most on an intraday basis since Jan. 27 - to 16.65 Swiss francs and were trading at 16.72 Swiss francs as of 9.20am in Zurich.

The bank reported a core equity Tier 1 ratio of 13.5 per cent in the second quarter, down from 14.1 per cent at the end of March.

The decline in the capital ratio may mean less cash available for potential buybacks.

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Chief executive officer Sergio Ermotti told shareholders at the annual meeting in May that the bank may return to share buybacks for the first time in a decade if legal and regulatory costs decline.

In the years since the financial crisis, UBS has scaled back its investment bank to free up capital to comply with tougher rules on loss-absorbing capacity.

Chief financial officer Kirt Gardner said on a conference call the bank's capital ratio remains strong. The lender has a CET1 leverage ratio of 3.7 per cent and total loss-absorbing capacity of 74 billion Swiss francs (S$104.853 billion). It expects an additional 6 billion francs in risk-weighted assets in the second half, with a target of 250 billion in risk-weighted assets.

Assets Increase The bank said its risk-weighted assets increased by 15 billion Swiss francs in the second quarter, most of which was due to regulatory-driven changes in the way it evaluates risk.

Basel regulators are putting the final touches on post-crisis capital rules, setting stricter standards for how lenders estimate the riskiness of their assets.

Net income rose 13.5 per cent to 1.2 billion francs from a year earlier. Analysts were expecting 800 million francs, the average of four estimates compiled by Bloomberg.

Pretax profit from the US private wealth business rose 25 per cent to 297 million francs from a year earlier, missing estimates for 345 million francs compiled by the bank.

Wealth management Americas, as that unit is called, had outflows of US$6.4 billion, reflecting "lower recruiting in the quarter", the bank said.

Those outflows are set to steady, Mr Gardner said.

The decline in the capital ratio is likely to be confusing to the market, according to analysts at JP Morgan Cazenove, which maintained its overweight recommendation on the stock while saying the bank "could have done better considering market environment".

Mr Gardner said that Swiss financial regulator Finma is pushing up standards in preparation for the new Basel standards.

Finma has been reviewing the bank's portfolio as part of a multi-year process that accelerated this year. 

The additional risk-weighted assets were mainly for Lombard lending, real estate and counter-party risk in the investment bank, he said.