Top dealmakers from global investment banks have been heading to Zurich in recent weeks to pitch UBS Group AG on transactions that could change the face of Swiss finance.
The bank’s senior leadership has been sitting through presentations as they seek a solution to perhaps its biggest challenge in over a decade: A $26 billion increase in capital requirements leveled by its home government, Switzerland.
Options theoretically on the table range from the dramatic — a merger or acquisition deal with a non-Swiss bank allowing a change in domicile and escape from the oncoming rules — to the more mundane, such as a range of technical tweaks that can put just enough capital away over the coming years.
As of now, UBS is in little mood for sudden radical moves as it limbers up for as many as three years of lobbying and public positioning while a bill moves through the Swiss parliament, according to people familiar with the matter. Yet there are voices warning that a tectonic shift may still be needed if Switzerland proves inflexible in its demands.
The clash stems from measures unveiled after UBS’s government-brokered rescue of Credit Suisse in 2023. The firm’s enlarged size has prompted worries that Switzerland won’t be able to bail it out in any future crisis.
Chairman Colm Kelleher has blasted the new capital demands as “extreme,” warning they handicap UBS against global rivals. Finance Minister Karin Keller-Sutter shows no sign of softening the bill to be put before the Swiss parliament, even as Switzerland faces rising trade tariffs from US President Donald Trump.
“It’s definitely too early to jump on commenting any potential scenario and what our responses will be,” UBS Chief Executive Officer Sergio Ermotti said on Bloomberg Television on Sept. 11. “Of course, the requirements, as they are proposed, are very punitive and excessive, and therefore, we will need to think how we protect our shareholders’ and our stakeholders’ interests.”
The following hypothetical scenarios are the result of discussions with analysts, industry experts and current insiders. No decisions have been taken and the bank will give an update on its position regarding the Swiss government’s reform outline later this month. UBS declined to comment further on their thinking for now.
Here’s the Problem
Higher capital requirements can make a bank safer — but less profitable. The key issue for UBS is the way in which the risk in its foreign subsidiaries is accounted for at home, at the so-called parent bank. The Swiss government wants all of that to be deducted from the parent bank’s capital, meaning the lender is already prepared to shoulder major losses should things go badly wrong abroad.
Such a move would mean that UBS’s CET1 ratio — the amount of highest-quality shareholder equity compared with its assets adjusted for risk — would rise to about 19% over the coming decade, all else being equal. While some argue that could lead to lower borrowing costs because the bank will be seen as more robust, it is far in excess of what peers can operate with.
To increase capitalization, the bank can limit investor payouts or ask investors for more cash — neither of these are attractive options by themselves as they annoy existing shareholders and depress the share price. It can also change the mix of the business units in the bank over time, in order to reduce assets.
Slimming Down
That calculus begs the question for executives — is there a business we can do without altogether? A sale or running down of a risky unit that requires a lot of capital could immediately improve UBS’s chances of meeting the upcoming government rules.
UBS’s core business is global wealth management, with about $166 billion in risk-weighted assets — managing a total client asset pile of more than $4 trillion.
Pascal Mora/Bloomberg
Given its higher level of risk, the investment bank attracts attention as a candidate to be downsized or spun out. Even as a combination of UBS and Credit Suisse’s investment banks, it’s small compared to Wall Street peers. UBS radically downsized its trading and deal-making department after the 2008 financial crisis, and Credit Suisse also cleared out its own unit in its final years.
Yet the investment bank provides valuable, complex services for UBS’s ultra-high net-worth clients — and its traders and dealmakers are frequently sources of outsize profits in volatile times. Truncating the investment bank even further would be a hit to UBS’s prestige — a gamble at a time when the bank faces rising competition in Asia and the US.
A more pragmatic option would be to pare back specific, riskier, businesses such as lending to highly-indebted companies. Prime brokerage, the business of lending to hedge funds, is another potential area of focus since capital requirements have increased under the latest global capital reforms.
Another unlikely but capital-effective way to downsize the balance sheet would be to carve out the Swiss universal bank, known as Personal & Corporate. That part of the bank is already well separated from the rest, and the idea has some pedigree — Credit Suisse had a plan in the drawer to make a similar move in the run up to its downfall in 2023.
“We are looking at every option available to us including the costs and trade-offs of each,” UBS Chief Financial Officer Todd Tuckner said at the Bank of America Financials Conference on Tuesday.
Technical Fixes
There are several more technical ways to squeeze UBS’s balance sheet or sidestep the parent-bank requirement without painful amputations, though there’s no single remedy.
The bank can boost the use of so-called
Some analysts place more hopes in so-called “upstreaming” — a scenario where cooperative foreign regulators allow UBS to repatriate excess capital located in its businesses abroad. The bank has already planned some $5 billion in transfers over time through this method. Benjamin Goy at Deutsche Bank AG sees the potential for more from Credit Suisse’s former UK-based unit and from UBS’s subsidiary in the US.
Still, global regulators have been asking banks to keep more of their capital in the markets where they operate, and regulatory sources say lenders face high hurdles for repatriating funds to their parents.
Tuning Up
Making the bank smaller in order to survive the Swiss regulation revamp is obviously less attractive for bosses normally programmed for growth. Ermotti has already insisted that “shrinking is not an option.”
In fact, doing more or less what UBS is already doing — just better — could be a way to meet the capital demands without bigger changes.
Assuming a six- to eight-year implementation period and the $5 billion in upstreaming, UBS would need to set aside about $2.6 billion per year to fill the gap before other steps to optimize the balance sheet are taken into account, analysts at JPMorgan Chase & Co. including Kian Abouhossein have calculated.
Apart from the ongoing run-down of Credit Suisse assets and the target for $13 billion in cost savings by 2026, UBS is already focused on improving performance in wealth management, particularly in the Americas. The region ranks alongside Switzerland as the biggest generator of revenue — but expenses are far higher. UBS wealth-management in the Americas has a cost-to-income ratio of over 90%, the worst in the group.
Paul Yeung/Bloomberg
Earning their way out of the squeeze could work for UBS if its new-ish Americas boss Rob Karofsky can turn around this less-efficient part of the business. The bank currently targets 15% profit-before-tax margin in the region by 2027 — compared with the current 12%. Part of the drag on the setup there is that UBS had almost 6,000 wealth advisers selling products in the US at the end of last year — but they don’t directly work for the bank, rather are semi-independent. Keeping this model working in UBS’s favor while reducing costs is a key challenge for Karofsky.
Yet in any scenario where UBS decides to tough it out and absorb the higher capital requirements, investors will be nervous about their chances of seeing much in further payouts. The bank is currently is committed to buying back up to $3 billion in shares this year, but next year’s tally won’t be communicated until after the first quarter.
There may be another way. It’s clear that the so-called Swiss Finish — tougher regulation at home than elsewhere — has its costs for UBS investors. Uncertainty over regulation has hampered the bank’s share price even as the wider European banking sector rallied 30%. For some, it would be better to leave altogether.
In March this year, Bloomberg reported that the bank was evaluating shifting its headquarters in response to the oncoming capital increase — a dramatic consideration that would be a massive rupture for UBS, whose more-than-160-year history has been inextricably linked to the fortunes of the country and would likely face many obstacles. The lender’s brand heavily relies on Switzerland’s appeal as a haven for the money from the ultra-rich.
Even so, a different domicile would rid both UBS and Switzerland of the problem of being a large global bank headquartered in a rich but small country with limited fiscal resources — in case a bailout ever is needed again.
Senior executives have moved somewhat away from that option in the last few months, and former senior figures at the bank have described it as having zero, or close to zero, probability. Yet the prospect of any takeover activity in the coming years also poses an opportunity for a fresh start.
Kelleher has previously been open about wanting to buy a wealth-management firm in the US, and the Irishman’s long history at Morgan Stanley gives him links there that could form the nucleus of a future deal Stateside. Some executives are of the view that the bank could use an international M&A event as a chance to “back into” a new domicile, according to a person familiar with the matter. Discussions with regulators in the US on an exploratory basis have taken place, the New York Post has reported.
For others, the bank is vulnerable to opportunistic predators looking to snap up one or other of its profitable businesses while the overall valuation is subdued. Presented with an offer, UBS may be obliged to take it seriously. These scenarios remain low in likelihood.
For now, UBS executives are stressing the more standard solutions — continue to perform well, and hope that Swiss parliamentarians give them the benefit of the doubt. A vote on the final law on isn’t expected until the end of 2027 at the earliest.
But long before that, the standoff is likely to unnerve UBS’s major investors. In the past week, Lars Foerberg, co-founder of Cevian which holds about 1.4% of UBS stock, told local media that the bank has no choice to but leave.
The authorities “know full well that the proposed, extreme capital requirements mean that UBS will have to leave. They simply don’t want to say it,” he said.