UBS: Swiss Banking Report Appears Spread Positive, Equity Payouts In Question

Swiss Federal Council has published its 209-page report on banking stability (post-CS) which appears set to increase capital requirements and limit growth for UBS (UBSG SW). The key recommendation around capital backing of foreign subsidiaries could be a key spread positive across a range of UBS credit entities.

• A key phrase in the Q&A to the document states that new measures “proposed in the TBTF [too big to fail] report by the Federal Council in the area of capital among others, provide incentives to limit both risk and growth.”
• UBS’s capital structure, even before the acquisition of CS, was complex. If we add the CET1 capital within the overseas subsidiaries reported in the Pillar 3 report* there is USD39bn. This is around half of the group’s last reported CET1 figure of USD78.6bn.
• The current capital backing of those subsidiaries is rising to 60% and this new document states regulations are “aiming for a significant increase in this capital backing”. Every 10pp above 60% is around USD6.5bn of additional capital requirement from the parent, we calculate.
• UBS, with a group CET1 ratio of 14.5% now, has headroom within regulatory minima so an equity raise is far from a certainty but it seems apparent equity holder payouts may disappoint from here to raise the capital levels. This should be spread positive, in our view.

*UBS Europe SE, UBS Americas Holding LLC, Credit Suisse International standalone and Credit Suisse Holdings (USA), Inc.