UBS to plead for capital leniency
UBS will set out a formal response to the Swiss government’s proposals to increase the capital the group must hold by early September, with chief executive Sergio Ermotti indicating he would argue that the new rules would not necessarily help the bank's domestic customers.
“In principle, we support most of the proposals as long as they are consistent with the Swiss Federal Council's aims of being targeted, proportionate and internationally aligned. However, the proposed changes to the capital regime do not meet those criteria,” he said.
“The proposal failed to recognise that UBS has had a consistently strong capital position. Further, it disregards the significant diversification value our foreign subsidiaries provide to all of our stakeholders, including our clients in Switzerland. We are strong thanks to our global footprint not in spite of it.”
In June, the government set out plans requiring UBS to hold an estimated US$26bn more in capital, but the bank said, when releasing second-quarter results on Wednesday, that it could ultimately need to hold an additional US$42bn.
Ermotti said the bank would not rush to make decisions, noting that there was a long consultation period in the Swiss parliament and a pledge to introduce the rules gradually. However, he did make a case for not unduly hampering the group and making it an outlier among its global banking peers.
"We do not want to be loved but we do want to be respected," he said.
The proposals basically ask UBS to fully capitalise its subsidiaries outside Switzerland rather than allowing some leniency on this, as at present, because it is currently treated as “double-counting”. The impact would be to increase the total amount of capital parked at group level.
UBS did not comment on the other major government proposals to wind down issuance of its Additional Tier 1 bonds. Such instruments issued by Credit Suisse were wiped out when that bank was rescued by UBS in March 2023 rather than being bailed in at a particular trigger point.
Consultations about the legislation, designed to end a bank being too-big-to-fail, have started but the laws are not due to enter into force before 2028, although some connected ordinances can be imposed from 2027. UBS would also have up to eight years to implement rules.
“We are not going to front-run any new capital regime, that's clear," said Ermotti. “This is a political process which we fully respect. Our aim is simply to contribute to the debate. So, as I said, early on in September, most likely we will be able to comment on this proposal publicly.”
UBS has said its Common Equity Tier 1 ratio could rise from 14% to 17%, far higher than major US banks, which have ratios of less than 13%.
Ermotti declined to comment on suggestions it could move UBS’s headquarters to another jurisdiction or face a takeover offer. He said there was no plan to reduce the size of the investment bank relative to other activities either.
Johann Scholtz, senior equity analyst at Morningstar, said: “UBS is lobbying hard to soften the blow, but it’s likely the bank will need to hold significantly more capital going forward — putting pressure on future returns.”
Markets roaring
UBS’s second-quarter results saw a record result notched up in global markets, with revenues leaping 25% to US$2.29bn, responding to the volatility sparked by US president Donald Trump’s tariff policies unveiled on April 2.
Equities revenues were up 20% to US$1.62bn and revenues from FX, rates and credit trading jumped 41% to US$667m. Total revenues at the investment bank rose 6% to US$2.97bn.
“This reflects the strength of our equities franchise where we are benefiting from market share gains,” said Ermotti. “It also highlights the value of our leading FX business where our expertise helps our institutional clients and Swiss corporate clients navigate market volatility."
UBS acknowledged that it had had to compensate 200 wealth management clients regarding the sale of complex FX products around Trump's 'liberation day' but said the cost of this was “not material”. Todd Tuckner, chief financial officer, said the financial impact was “substantially captured” in the second-quarter results.
On the primary side, revenues across global banking fell 30% to US$681m. Capital markets revenues fell 34% to US$488m as the bank took a US$48m net credit loss relating to a leveraged capital market position.
More broadly, the group said it had a weaker period than peers as its business was less focused on coprorates, where much of the activity had been, rather than sponsors, where it was more strongly positioned.
One bright spark was equity capital markets, where revenues rose 45%, albeit from a low base as IPO activity started to recover.
“In global banking, while I'm encouraged by the continued strengthening of our deal pipeline, client execution of strategic plans was delayed once again this quarter due to ongoing market uncertainties related to international trade and economic policies,” said Ermotti.
“Investor sentiment remains broadly constructive tempered by ongoing uncertainties and a degree of news fatigue. Having said that, clients are ready to deploy as soon as conviction around the macro outlook strengthens.”
On the markets side, the bank said the third quarter should see more normalised revenues. “Looking ahead, UBS hinted at softer revenue in Q3 as trading activity from both wealth and investment banking clients normalises after a volatile first half,” said Scholtz.