UBS, Credit Suisse Investors Seen Taking Hit From Leverage Rule

  • Switzerland said to set leverage ratio at 5% in line with U.S.
  • UBS estimated 1 percentage point increase to cost $1 billion

Swiss demands for bigger capital cushions may force UBS Group AG to postpone higher payouts and push Credit Suisse Group AG into a share sale after regulators rebuffed banks’ pleas for more lenient terms.

Switzerland’s finance ministry is set to demand that the country’s biggest banks hold capital of about 5 percent of total assets, in line with the U.S. leverage ratio for its biggest banks and above the 3 percent globally agreed requirement, according to people briefed on the deliberations, who asked not to be identified because the talks aren’t public.

Switzerland is developing its stricter rule at a critical juncture for Credit Suisse, where Chief Executive Officer Tidjane Thiam is preparing to make an announcement on strategy Oct. 21. The new requirements -- building on a global regulatory effort to boost banks’ financial strength and prevent financial crises -- will pressure both of the nation’s biggest lenders to add billions of equity to their buffers or shrink their activities. UBS and Credit Suisse had argued that the Swiss financial system isn’t comparable with the U.S., where lenders can take advantage of a bigger capital market to hold fewer assets.

Stock Offering

“This looks better for UBS than for Credit Suisse,” said Guy de Blonay, a fund manager at Jupiter Asset Management Ltd. in London.  “Credit Suisse may need more rather than less capital and shrinking the balance sheet.”

Thiam has already said he plans to cut costs and shrink its investment bank, which absorbs more than half the bank’s capital. Choosing where to invest capital and where not to is crucial, he said in a memo on his first day as CEO. The investment bank delivered less profit than the money managing businesses of the bank in the first half of this year.

The firm is weighing a stock sale that may raise between 6 billion Swiss francs ($6.2 billion) and 8 billion francs, a person with knowledge of the plan said last week.

The new rule may require the two banks to hold 3.5 percent of total assets in common equity, topped up with 1.5 percent in convertible bonds, one of the people said. That would leave Credit Suisse with a capital shortfall of 8.7 billion francs, based on its financial situation at the end of the second quarter, UBS analysts Daniele Brupbacher and Mate Nemes said in a note last week.

“This capital increase should allow Credit Suisse to start its restructuring plan unhindered,” Alevizos Alevizakos and Jonas Floriani, analysts at Keefe Bruyette and Woods Inc., said in a note. “Given the potential 5 percent leverage ratio, we understand why Mr. Thiam would prefer to build some capital buffer ahead of the potentially costly IB deleveraging.”

Shares Drop

UBS is closer to meeting the common equity requirement, as it already had a 3.2 percent common equity leverage ratio in June. Complying with the new requirements may mean shareholders will have to make do with slightly lower dividends for a while, said Peter Stenz, a fund manager at Zuercher Kantonalbank who helps manage shares of both banks.

The banks are aware of the government’s position and will be able to factor it into calculations of their future capital needs for their third-quarter earnings reports, three people said. Mario Tuor, a spokesman for the government, declined to comment on how high the leverage ratio would be.

UBS shares fell 1.1 percent Tuesday, valuing the bank at 72.5 billion francs. Credit Suisse dropped 0.7 percent, valuing it at 39.3 billion francs.

“We see government plans as entirely consistent with existing restructuring expectations with improving visibility useful to CS in sizing any upcoming capital increase,” said Jon Peace, an analyst at Nomura Holdings Inc., in a note.

A government-appointed expert panel recommended in December that Switzerland follow the lead of the U.S., which in recent years has introduced some of the world’s toughest capital requirements. Zurich-based UBS and Credit Suisse reported Basel III leverage ratios of 3.6 percent and 3.7 percent at the end of the second quarter, indicating they would be more than 1 percentage point short of the new target. These numbers include additional Tier 1 securities.

‘Apples and Potatoes’

UBS CEO Sergio Ermotti, who has said he isn’t against stricter regulation in principle, has decried the plan to use a U.S.-style leverage ratio as a standard for Switzerland, describing the two financial systems as similar as “apples and potatoes.” Among the differences, the market for securitized debt is bigger in the U.S., meaning its banks can pass on more of the risks of lending by packaging their loans into tradable securities.

An increase in the leverage ratio of 1 percentage point would cost UBS an extra 1 billion francs a year, he said in June. “And who profits most if we adapt to the American rules?” he said in a speech in August. “The U.S. banks.”

Switzerland imposed some the world’s strictest too-big-to-fail requirements in 2011 after the government came to UBS’s rescue during the 2008 financial crisis. UBS and Credit Suisse have assets of 1.83 trillion francs combined, about three times the size of the Swiss gross domestic product, making the two banking behemoths a disproportionately bigger danger to their country’s economy if they fail than their peers elsewhere. Both are compliant with all Swiss capital rules.

“The loss potential for the Swiss big banks – estimated under the different adverse scenarios considered – continues to be substantial relative to their capitalization,” the Swiss National Bank said in a report in June. The central bank recommended the banks improve their leverage ratio.

Regulators are now fine-tuning the proposed rule, which the government still has to approve. The leverage ratio is still below what some Swiss lawmakers have demanded. The Swiss lower house last month called on the government to increase the leverage ratio to 6 percent over two years.

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