UBS, Credit Suisse Payout Hopes Ebb as Regulators Tighten Leash
Prospects for fatter dividend payouts from Switzerland’s biggest banks are receding as Swiss authorities ratchet up capital demands.
UBS AG (UBSN), the nation’s largest bank, was told to hold more capital for legal risks this quarter, while the finance minister said last month leverage rules might be tightened. Credit Suisse Group AG (CSGN), the No. 2 bank, is in talks with the regulator that may also lead to a demand for more capital, though it would be much smaller in scope than for UBS, a person with knowledge of the matter who asked not to be identified said this month.
The tighter requirements, on top of stricter rules implemented over the past five years, arrived as the banks were preparing to start paying higher dividends. UBS Chief Executive Officer Sergio Ermotti, 53, pledged to pay out more than half of profits to shareholders once the company reaches a common equity ratio of 13 percent -- a level that probably would have been achieved this year without the fresh demands.
“The message from regulators is very clear: ‘if you think you can pay dividends, forget it,’” Oswald Gruebel, who served as CEO of both Zurich-based UBS and Credit Suisse, said by phone. “They don’t want to let banks pay any dividend. It’s totally open how long this will last.”
UBS dropped 16 percent in Swiss trading since Oct. 29, when the bank said increasing capital requirements would push back its target for return on equity, a measure of profitability, by at least a year. Credit Suisse fell 9.6 percent in the period, while the Bloomberg Europe Banks and Financial Services Index of 44 companies declined 4.6 percent.
Delayed dividend prospects make shares of UBS and Credit Suisse less attractive than European competitors, said Peter Braendle, who helps manage more than 50 billion Swiss francs ($56.4 billion) at Swisscanto Asset Management in Zurich.
Tightening rules would make it “more difficult for banks here to reach profit targets and to bring dividends back to an appropriate level,” said Braendle. “It will take them years to adjust. I prefer banks in other European countries, which have a cheaper valuation and will probably have a more favorable regulatory environment.”
The estimated dividend yield is 1.3 percent for UBS shares and 3.05 percent for Credit Suisse, data compiled by Bloomberg show. That compares with 3.3 percent at BNP Paribas SA, France’s largest bank, and 9.9 percent for Banco Santander SA (SAN), Spain’s biggest bank.
Analysts following UBS have lowered their forecasts for dividends from the bank even as they raise them for earnings, and now on average estimate the company will pay 1.13 billion francs less to shareholders for 2013 and the following two years than they did before UBS disclosed the new capital demand, Bloomberg data show. Estimates for Credit Suisse dividends have also been reduced, though not as much.
UBS paid 9 percent of profit as dividends for 2011, after skipping cash distributions for four years. For 2012, investors received 15 centimes a share as the bank had an annual loss. That compares with cash dividends amounting to 36 percent of earnings for 2006, before the financial crisis, data compiled by Bloomberg show. Credit Suisse paid dividends partially in shares for the past two years to build up capital after distributing 32 percent of 2006 earnings.
After scaling back estimates, analysts on average don’t foresee UBS paying out more than 50 percent of earnings this year or in 2014, when the bank said it expects to meet its capital target. Credit Suisse’s payout ratio for 2014 is seen marginally higher than for this year at 36 percent, even though the bank has already met its capital target.
Credit Suisse CEO Brady Dougan, 54, promised a “material cash dividend” for 2013 that would increase over time. The bank doesn’t have a target for a payout ratio.
Officials for UBS and Credit Suisse declined to comment on dividend plans beyond previous statements.
Switzerland has historically imposed capital requirements on its banks that exceeded international standards. As the financial crisis unfolded, UBS and Credit Suisse initially resisted as regulators began tightening rules in response to billions of francs in writedowns and losses related to subprime mortgages, the Swiss Financial Market Supervisory Authority said in a report in September 2009. Resistance subsided after the September 2008 bankruptcy of Lehman Brothers Holdings Inc., the report said.
Rules requiring the banks to rein in borrowing and increase holdings of cash and readily tradable securities followed, as well as special standards for systemically important banks. While Swiss regulators acted more quickly than most peers, international banks have since narrowed the gap.
At the end of 2010, UBS’s core tier 1 capital ratio, a measure of financial strength, stood at 15.3 percent under Basel II standards, the highest among the 23 biggest European banks, according to data compiled by Bloomberg Industries. Credit Suisse, at 12.2 percent, was sharing fourth place with SEB AB, and trailing Swedbank AB and Svenska Handelsbanken AG.
Under fully-applied Basel III rules, the banks’ common equity ratios stand out less. UBS was in seventh place at 11.9 percent at the end of September, and Credit Suisse in 11th place with a 10.2 percent ratio.
The regulator’s recent push to require the banks to increase capital for operational risks, such as litigation, corresponds with a surge in fines and legal expenses for lenders. Europe’s biggest banks racked up more than $77 billion in legal costs since the financial crisis, five times their combined profit last year, data compiled by Bloomberg show.
Examining banks’ internal models is one of Swiss Financial Market Supervisory Authority’s main tasks and it can impose surcharges if results don’t correspond to a conservative assessment of potential risks or empirical evidence, spokesman Tobias Lux said in October. Finma declined to comment on individual demands for banks.
Credit Suisse has been in talks with Finma since early 2012 about the models it uses and has already increased assets weighted for operational risks by 24 percent to 44.8 billion francs through the end of September, company reports show.
As risk-weighted assets rise, banks must hold additional capital to make sure reserves meet requirements. The bank said it doesn’t anticipate changes in capital demands outside of the “normal range” of quarterly variations.
A 10 percent increase to operational risk-weighted assets from the end-September level would mean an additional 450 million francs of capital that Credit Suisse would need to hold, assuming the bank’s targeted 10 percent common equity ratio.
For UBS, which was ordered to raise risk-weighted assets related to litigation by 50 percent, the requirement will outweigh a capital boost it predicted from buying the fund the Swiss central bank set up to wind down its toxic assets from the subprime crisis.
The fund, a key part of the bailout plan for UBS in 2008, generated a $5.36 billion profit for the Swiss National Bank, while the Swiss government made a 1.2 billion-franc profit on its 6 billion-franc capital injection.
UBS’s common equity ratio would have risen by a percentage point to 12.9 percent when it repurchased the fund, putting UBS within reach of its 13 percent target. Instead, the regulator’s order contributed to a decrease to 11.6 percent.
“I don’t think that the regulators are going to allow UBS to pay out the extreme dividends that they gave indications for,” said Alevizos Alevizakos, a London-based analyst at Mediobanca SpA. Both banks will have to restrain payouts and buybacks “while they don’t know exactly what the regulator is going to ask them, which I think will be a key trend in the years to come.”
Five days after UBS announced the new capital demand, Swiss Finance Minister Eveline Widmer-Schlumpf shook the industry by saying the leverage restriction for too-big-to-fail banks may be too low.
Under current rules, UBS and Credit Suisse expect they’ll have to hold capital equivalent to 4.2 percent of total assets by 2019 -- above the 3 percent minimum approved by the Basel committee for banks globally. The requirement depends on factors such as the size of banks’ balance sheets and the complexity of their corporate structures. A higher requirement would force banks to shrink further or accumulate more capital.
“People talk about 6 percent to 10 percent now,” Widmer-Schlumpf said, according to Schweiz am Sonntag newspaper.
Seeking to quell the furor the remarks generated, the finance ministry said the following day there are no changes planned to leverage requirements before 2015, when a review of too-big-to-fail rules will be conducted. The comments nonetheless fed a perception that the bar for Swiss banks will keep rising as authorities try to risk-proof the system.
“The finance minister’s comments left a bad taste and the risk of more regulation is still there, it’s just been put off into the future,” said Swisscanto’s Braendle. “Investors are still insecure.”
Bank executives have pushed back. Ermotti called the leverage requirement suggested by Widmer-Schlumpf an “unrealistically high demand,” Schweiz am Sonntag newspaper reported Dec. 15, citing an interview. Credit Suisse Chairman Urs Rohner said he doesn’t expect a tightening of the requirement will be necessary in 2015, according to an interview in Bilanz magazine this month.
The Swiss central bank, which was first to suggest the introduction of a leverage limit in the aftermath of the global financial crisis, considers the ratios of the two banks as “still below the average of large global banks,” SNB Vice President Jean-Pierre Danthine said in a speech Dec. 12.
“Economic and financial conditions for the Swiss banking sector continue to be challenging,” Danthine said. “For this reason, it is vital for the big banks to continue improving their capitalization, and in turn their resilience, particularly as regards the leverage ratio.”
Swiss regulators have shown a readiness to be tough on banks. Credit Suisse was forced to boost capital by 15.3 billion francs last year through a package of measures after the central bank’s demand for a “marked increase” sent the stock down more than 10 percent in one day.
The SNB this year declared Zuercher Kantonalbank, a regional state-owned lender a seventh of UBS’s size, systemically important, meaning it will have to fulfill stricter requirements.
Regulators elsewhere are also tightening the leash. The U.S. Federal Reserve and the Office of the Comptroller of the Currency proposed in July to ask the nation’s eight largest lenders to hold as much as 6 percent of equity capital in relation to their assets. Swedish banks, which have the highest capital ratios under Basel III rules among major European lenders, were told by the regulator last month to limit dividends and use surplus cash to pad buffers as risks in the property market grow.
“Swiss regulators are moving in the direction of tightening requirements for the whole Swiss banking system to be able to take the Swiss taxpayer off the hook in the future,” said Dirk Heise, the primary credit analyst for the nation’s banks at Standard & Poor’s. “We consider this as a moving target, and in an international context, regulations are subject to further enhancements as well.”
Moving-target regulation would make life “very complicated” for banks, Claude-Alain Margelisch, CEO of the Swiss Bankers Association, said last month. It may also repel investors, said Gruebel, 70, who cut assets and built up capital at UBS after the financial crisis while curbing dividends.
“You really have to ask yourself why you want to be a bank shareholder,” he said. “Banks are too expensive, you won’t get any dividends because the regulator will make sure that you don’t and in case the company gets into difficulty, shareholders get totally wiped out.”
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