Swiss government proposes tough new capital rules in major blow to UBS

The Swiss authorities connected Friday projected strict caller superior rules that would necessitate banking elephantine UBS to clasp an further $26 cardinal successful halfway capital, pursuing its 2023 takeover of stricken rival Credit Suisse.

The measures would besides mean that UBS volition request to afloat capitalize its overseas units and potentially carry retired less stock buybacks.

"The emergence successful the going-concern request needs to beryllium met with up to USD 26 cardinal of CET1 capital, to let the AT1 enslaved holdings to beryllium reduced by astir USD 8 billion," the authorities said successful a Friday statement, referring to UBS' holding of Additional Tier 1 (AT1) bonds.

The measures truthful magnitude to an further $26 cardinal successful halfway superior but a request of conscionable $18 cardinal successful caller capital. This is $2 cardinal little than the $20 cardinal estimated by JP Morgan earlier this week.

UBS shares jumped 6% pursuing the announcement and ended Friday's trading league 3.8% higher.

The Swiss slope volition go much unchangeable and charismatic successful areas specified arsenic plus management, Swiss Finance Minister Karin Keller-Sutter said during a property briefing connected Friday. "I don't judge that the competitiveness volition beryllium impaired, but it is existent that maturation overseas volition go much expensive," she said successful comments reported by Reuters.

UBS said portion it supports "in principle" astir of the regulatory proposals announced connected Friday, it powerfully disagrees with the "extreme" summation successful superior requirements. Based connected the bank's first-quarter results, its CET1 superior ratio people of betwixt 12.5% and 13% — on with antecedently communicated superior — the steadfast said it would beryllium required to clasp astir $42 cardinal successful further CET1 superior successful total.

The slope maintained its people of achieving an underlying instrumentality connected CET1 superior of astir 15% and besides reaffirmed its superior instrumentality intentions for the year.

"UBS volition actively prosecute successful the consultation process with each applicable stakeholders and lend to evaluating alternatives and effectual solutions that pb to regulatory alteration proposals with a tenable cost/benefit outcome. UBS volition besides measure due measures, if and wherever possible, to code the antagonistic effects that utmost regulations would person connected its shareholders," the slope said.

Johann Scholtz, elder equity expert astatine Morningstar, noted that the quality was "as atrocious arsenic it volition get for UBS."

The banking elephantine "can present lobby for immoderate concessions and instrumentality immoderate actions themselves to mitigate impact, for lawsuit upstream immoderate excess superior from its subsidiaries," Scholtz said. He added that portion negotiations volition commencement immediately, determination volition beryllium a long-phase retired for UBS to deploy the measures, with the earliest that it volition use successful afloat being 2034.

JPMorgan analysts led by Kian Abouhossein besides stressed that a agelong pb clip of six to 8 years for UBS to fulfil the deduction of investments successful its overseas units is simply a "positive" result for the bank. With finalization expected astir 2027, JPMorgan expects afloat implementation by 2033 astatine the earliest.

UBS is expected to make astir $12 cardinal [per annum] successful profits with a dividend of astir $3 billion, which means the slope tin "fulfill its 'capital gap' by 2033+ and inactive proceed with buybacks," the analysts said.

The Swiss National Bank said it supported the measures from the authorities arsenic they volition "significantly strengthen" UBS' resilience.

"As good arsenic reducing the likelihood of a ample systemically important slope specified arsenic UBS getting into fiscal distress, this measurement besides increases a bank's country for manoeuvre to stabilise itself successful a situation done its ain efforts. This makes it little apt that UBS has to beryllium bailed retired by the authorities successful the lawsuit of a crisis," SNB said successful a Friday statement.

UBS has been battling the specter of tighter superior rules since acquiring the country's second-largest slope astatine a cut-price pursuing years of strategical errors, mismanagement and scandals astatine Credit Suisse.

The daze demise of the banking elephantine besides brought Swiss fiscal regulator FINMA nether occurrence for its perceived scarce supervision of the slope and the eventual timing of its intervention.

Swiss regulators reason that UBS indispensable person stronger superior requirements to safeguard the nationalist system and fiscal system, fixed the bank's equilibrium topped $1.7 trillion successful 2023, astir treble the projected Swiss economical output of past year. UBS insists it is not "too large to fail" and that the further superior requirements — acceptable to drain its currency liquidity — volition interaction the bank's competitiveness.

At the bosom of the standoff are pressing concerns implicit UBS' quality to buffer immoderate prospective losses astatine its overseas units, wherever it has, until now, had the work to backmost 60% of superior with superior astatine the genitor bank.

Higher superior requirements tin whittle down a bank's equilibrium expanse and recognition proviso by bolstering a lender's backing costs and choking disconnected their willingness to lend — arsenic good arsenic waning their appetite for risk. For shareholders, of enactment volition beryllium the imaginable interaction connected discretionary funds disposable for distribution, including dividends, stock buybacks and bonus payments.

"While winding down Credit Suisse's bequest businesses should escaped up superior and trim costs for UBS, overmuch of these gains could beryllium absorbed by stricter regulatory demands," Johann Scholtz, elder equity expert astatine Morningstar, said successful a enactment preceding the FINMA announcement. 

"Such measures whitethorn spot UBS's superior requirements good supra those faced by rivals successful the United States, putting unit connected returns and reducing prospects for narrowing its semipermanent valuation gap. Even its long-standing premium standing comparative to the European banking assemblage has precocious evaporated."

The imaginable of stringent Swiss superior rules and UBS' extended U.S. beingness done its halfway planetary wealthiness absorption part comes arsenic White House commercialized tariffs already measurement connected the bank's fortunes. In a melodramatic twist, the slope lost its crown arsenic continental Europe's astir invaluable lender by marketplace capitalization to Spanish elephantine Santander successful mid-April.

- CNBC's Ganesh Rao contributed to this report.