UBS is set to announce earnings for the first time since its merger with Credit Suisse on Thursday, in an event that will be watched closely by investors for any detail or hints on the Swiss bank's capital issuance plans.
The publication of the highly anticipated second-quarter results is happening later than usual as UBS has taken its time to assess Credit Suisse's business and plot its integration.
Investors will be alert for any pronouncements on UBS's needs or plans for Additional Tier 1 capital after Bloomberg reported on Friday that the bank is exploring a return the market, potentially as soon as September.
A first AT1 issuance from UBS following its rescue of Credit Suisse in March would be highly significant because holders of the latter's AT1s saw their investment controversially written down to zero in a move that sent shockwaves through the sector.
Market participants have debated whether the post-merger UBS has any need for new AT1 capital in the near-term given its strong Common Equity Tier 1 position, which some said would allow the bank to bide its time before issuing the product again. But with so much related to the merger up in the air, onlookers have been forced to wait for the bank's fresh figures.
Sources said UBS had received many questions from investors since the publication of the story and said Thursday's results would provide more clarity, although one suggested talk of an imminent return to the AT1 market was premature.
Some analysts have suggested that the bank will be keen to maintain its investor-friendly policy of calling its AT1s at the first opportunity.
UBS's next AT1 to come up for a call is a S$700m 5.875% transaction that can be redeemed on November 28. After that is a US$2.5bn 7% note, which is callable in January.
"An extension of an AT1 after the merger was just so recently completed would come with a clearly negative signalling effect in our view, and we consider UBS will seek to call its AT1 at the first call date," wrote Suvi Platerink Kosonen, senior sector strategist for financials at ING.
The bank did call a US$2bn 5% AT1 in January without replacing it, taking advantage of its surplus of capital over minimum requirements – even ahead of the merger.
UBS has said it expects its CET1 capital ratio to be around 14% in the second quarter of 2023 and to remain around that level throughout 2023.
Upon the closing of the acquisition, Fitch said that it sees substantial upside to UBS's internal capital generation.
"This will also help UBS to meet future higher regulatory capital requirements likely to be imposed by the Swiss regulator to reflect the group's larger size," wrote the rating agency. "We expect UBS to manage down its CET1 and leverage ratios toward its guidance of about 13% and at least 3.7% in the long term."
A price to pay
Bankers have said that whenever UBS ultimately returns to the AT1 market, it will likely have to pay up. Many investors were burned when the Swiss regulator Finma wiped out Credit Suisse's AT1 stack, while still giving the bank's equity holders shares in UBS, in an inversion of the typical credit hierarchy.
The controversial move triggered a dramatic sell-off of the AT1 product. Although the broader market has since recovered, Swiss AT1s have continued to underperform and bankers and investors have said UBS or other prospective issuers will have to pay an additional premium to reflect the perceived riskiness of the Swiss version.
The last European AT1 issuance in the US dollar market – where UBS has issued most of its AT1 – was a US$1.5bn perpetual non-call five-year from BNP Paribas priced at 8.5% in August. Such a coupon would be out of reach for UBS, said bankers.
UBS's last major-currency AT1 issuance was a US$1.5bn 4.875% perpetual non-call February 2027 transaction, sold in January 2022. The bond was bid at a yield-to-call of 11.1% on Wednesday, having traded at around 9.22% at the start of year.
The UBS bond now offers a pick-up of around 50bp over a US$1.25bn 4.625% AT1 also sold in January 2022 by BNP Paribas. At the start of this year, the UBS bond had traded around 100bp inside the BNP Paribas comparable.