Exclusive: Switzerland and UBS could compromise on capital rules, sources say

Switzerland and UBS are privately signaling a potential compromise on new capital rules, initially proposed to require an additional $24 billion from UBS following the Credit Suisse collapse. While UBS views the current proposal as excessive and potentially prompting relocation, sources indicate the government may accept a reduced burden of around $15 billion, possibly by adjusting foreign subsidiary capitalization requirements or allowing Additional Tier 1 (AT1) debt for coverage. The legislative process is ongoing, with a final decision expected next year, as UBS faces investor pressure to resolve the issue impacting its competitiveness and capital structure.

Analysis

UBS and Swiss authorities are signaling a potential compromise on new capital requirements proposed after the 2023 collapse of Credit Suisse. The initial government proposal would require UBS to hold an additional $24 billion in capital, a figure the bank has strongly opposed, citing a competitive disadvantage against global rivals and even floating the possibility of relocating its headquarters. However, sources familiar with the situation indicate the government may be willing to accept a reduced burden of approximately $15 billion, an amount UBS could reportedly tolerate. This reduction could be achieved by lowering the capitalization requirement for foreign subsidiaries from the proposed 100% to around 80%, or by allowing UBS to use its substantial Additional Tier 1 (AT1) debt, which stood at $19 billion in June, to meet part of the new requirement. Despite these private signals of a compromise, the official process is in its early stages, with draft legislation not expected to reach parliament until next year. The regulatory uncertainty continues to weigh on the bank's valuation, as its shares have lagged peers and activist investor Cevian has urged for a less restrictive outcome to maintain competitiveness.

Key Decisions for Investors

• Investors should closely monitor the upcoming parliamentary committee meeting in November and subsequent legislative drafts for any confirmation of a compromise, as a final capital requirement closer to $15 billion would be a significant positive catalyst for UBS.
• The composition of the final capital requirement is critical; a solution allowing the use of AT1 debt would be less dilutive and more favorable for equity holders than one met purely through retained earnings or CET1 capital.
• Given the stock's underperformance relative to peers, the current valuation likely reflects a significant discount for this regulatory uncertainty, presenting a potential opportunity for investors who believe a favorable, sub-$20 billion compromise will be reached.
• Consider the non-zero tail risk of a harsher-than-expected regulatory outcome or a more aggressive corporate response, such as a headquarters relocation, which could introduce significant volatility.