UBS faces 9% profit hit from latest Swiss capital plan

[BERN] The latest capital reform proposal adopted by Swiss lawmakers would cut UBS Group’s earnings per share by 9 per cent, RBC analysts estimated. 

The decision “is close to the worst case,” RBC analysts Anke Reingen, Sherry Lin and Susana Cruz said in a note on Monday (Sep 28). 

The upper house of Switzerland’s Parliament last week adopted a plan that would require UBS to back 90 per cent of the value of its foreign units with high-quality equity capital known as CET1. That compares with a government proposal for 100 per cent. 

UBS has vowed to keep opposing the plans. It had been backing yet another initiative that would have allowed it to cover much of the new capital requirements with a type of junior debt known as AT1 bonds. 

The country’s largest bank has said the 90 per cent rule would damage its international competitiveness, estimating it would have to hold about US$16 billion in additional CET1 capital at its domestic unit. The news outlet Semafor reported last week that UBS has revived discussions about ways to move out from under Swiss regulators, including a potential combination with another large international bank.

“As the base case is clearer now, UBS might look into finalising mitigation plans,” the RBC analysts said in the note on Monday. “We do not believe selling itself/part of the operations are preferred options – but we don’t expect any disclosure to the market before the finalisation of rules.”

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A committee in the parliament’s lower house will be the next legislative body to take up the matter, with a debate and potential vote expected for its sessions in October and November. The full lower house is subsequently expected to debate the reforms, probably in its winter session lasting from Nov 30 through Dec 18. 

A group of lawmakers has floated another idea that would set the level of CET1 backing at 75 per cent, the newspaper NZZ reported over the weekend. If the two chambers end up supporting different proposals, the matter would go back and forth between them and probably converge toward a compromise. 

“The next steps are unlikely to bring softer rules (given lower house party composition) but at the same time the harsher outcome in the upper house might mean that an agreement between upper and lower house can be found earlier,” the RBC analysts said. BLOOMBERG