UBS challenges Swiss capital requirement hike

UBS supports most of the Swiss Federal Council's new regulatory proposals but strongly opposes the proposed increase in capital requirements, estimating it would need to hold an additional USD 24 billion in CET1 capital based on Q1 2025 financials. This is on top of the USD 18 billion in incremental capital required due to the Credit Suisse acquisition, totaling USD 42 billion. Despite these potential changes, UBS maintains its financial targets, including a 15% return on CET1 capital and a sub-70% cost/income ratio by the end of 2026, and intends to proceed with planned capital returns for 2025.

Analysis

UBS has articulated its support for the majority of new regulatory proposals from the Swiss Federal Council, yet strongly contests a significant proposed increase in capital requirements. The bank estimates these proposals would necessitate an additional USD 24 billion in Common Equity Tier 1 (CET1) capital on a pro-forma Q1 2025 basis, primarily due to demands for full deductions of investments in foreign subsidiaries, deferred tax assets, and capitalized software. This is incremental to the USD 18 billion in extra capital already anticipated post-Credit Suisse acquisition (USD 9 billion for removing regulatory concessions and USD 9 billion for increased size), bringing the total potential additional CET1 capital to approximately USD 42 billion. Despite these substantial regulatory headwinds, which are not expected to be implemented before 2027, UBS reaffirms its financial targets, including an underlying return on CET1 capital of around 15% and a cost/income ratio below 70% by the end of 2026. Furthermore, the bank maintains its 2025 capital return intentions, planning a 10% increase in ordinary dividend per share and share repurchases up to USD 2 billion, contingent on maintaining a CET1 capital ratio of approximately 14%. The mixed sentiment (-0.15 overall, -0.2 for UBS) reflects investor apprehension regarding these new regulatory burdens, even as UBS plans to actively engage in consultations to seek alternative, more balanced solutions and mitigate potential impacts on shareholders.

Key Decisions for Investors

• Investors should closely monitor the outcome of UBS's engagement with the Swiss Federal Council concerning the proposed capital rules, as modifications could materially alter the financial impact.
• Evaluate the credibility of UBS maintaining its circa 15% return on CET1 target and capital return plans against the potential USD 42 billion increase in CET1 capital requirements, even if phased in by 2027.
• Consider the potential for increased regulatory capital to constrain future growth initiatives or shareholder distributions beyond current guidance if mitigation measures are insufficient.
• Assess the bank's ability to generate sufficient internal capital or optimize its balance sheet to meet these heightened requirements without unduly impacting its cost/income ratio and profitability targets.