UBS's Global Expansion and Capital Requirements: Who Foots the Bill?
Zurich
UBS to Secure Additional Funds - Share Value Increases
Switzerland intends to tighten the capital requirements for UBS. As per Swiss regulators, the bank will soon need to fully finance the risks of its foreign subsidiaries with its own capital. Currently, the parent company only needs to back 60% of its subsidiaries' risk-weighted assets (RWA) with capital, with the remaining amount allowed to be covered by debt capital or self-developed software. The imposed changes prove necessary after the government-aided takeover of Credit Suisse, which had previously failed to meet these requirements.
26 Billion Swiss Francs in Extra Capital Needed
The new regulations would necessitate an additional capital requirement of around 26 billion Swiss Francs, based on today's RWA. Despite this, the bank's stocks saw an increase immediately following the proposal's announcement. UBS's shares ended the trading day with a gain of almost 5%. Seemingly, investors had already adjusted to this scenario during the extended debate in Switzerland. Moreover, UBS has been granted a lengthy implementation period, with plans for six to eight years.
However, a bill must first be drafted and presented to parliament in the fall. "The actual capital requirement will depend on many factors," the minister stressed. The requirement's impact will heavily depend on UBS's response to these altered conditions. For instance, CEO Sergio Ermotti has hinted at potentially moving the headquarters abroad or restructuring the bank's US business to reduce RWA, ultimately affecting the core capital ratios.
Who Pays for UBS's Overseas Growth?
"The additional requirements don't hit the Swiss business of UBS," the minister clarified. "However, expansion abroad will become more costly." The proposal mainly impacts the bank's international growth, stabilizing the Swiss business. This strengthens the bank's wealth management sector, which benefits from enhanced financial stability. The government's primary objective is to prevent recurring situations such as the rescue of Credit Suisse or the support measures provided to UBS during the financial crisis. "The question is who ultimately covers the costs of UBS's growth abroad," the minister reiterated.
Costs and Efforts
UBS is undergoing a massive cost-cutting and integration process in the wake of its acquisition of Credit Suisse, aiming to achieve $13 billion in gross cost reductions by 2026. So far, the bank has realized $8.4 billion in cumulative gross cost savings, amounting to about 65% of its target. These savings are part of an extensive strategy to increase efficiency and absorb rising expenses, including those associated with stricter regulations and global growth.
Who Bears the Brunt?
- Shareholders: The bank has signaled its commitment to shareholder returns, planning a 10% increase in its ordinary dividend per share for 2025[1][5]. Still, the increased capital requirements and integration costs may temporarily dampen profitability and, in turn, slow the growth rate of dividends or share buybacks compared to earlier estimates[2][5].
- Employees: The bank has highlighted rising personnel and administrative expenses and ongoing investments in digital infrastructure, both factors contributing to elevated costs[2]. Workforce reductions and branch consolidations have already been part of the integration strategy, suggesting employees may bear some of the costs through job losses or restructuring.
- Clients: Although not explicitly stated, banks may pass regulatory compliance costs on to clients through increased fees or reduced returns.
- Taxpayers and Broader Economy: There is no substantial evidence to suggest direct taxpayer involvement; however, the reforms are designed to protect the Swiss financial system, potentially lowering systemic risks for the broader economy.
Summary
Ultimately, UBS's shareholders and employees will likely bear the primary costs of the bank's increased capital requirements and global expansion. The bank is addressing these challenges by comprehensively reducing costs and refining operations[1][2][5]. Clients may face indirect costs, but the bank is aiming to absorb most regulatory expenses to maintain competitiveness. There is no indication of direct costs to Swiss taxpayers owing to these measures.
The imposed capital requirements for UBS's foreign subsidiaries might increasing the costs for the bank's expansion abroad, a question raised by the minister. To achieve $13 billion in gross cost savings by 2026, UBS is undertaking a massive cost-cutting and integration process, affecting shareholders, employees, and potentially clients as well.
