The editor considers what UBS might do if proposed federal Swiss capital rules, likely to be finalised next year, put it in an uncomfortable competitive position against international rivals.

When UBS reports its third-quarter financial results on Wednesday, perhaps more than is usual, we journalists will want to find any clues as to what CEO Sergio Ermotti (pictured below) and colleagues think of the suggestion that the bank might contemplate shifting its HQ out of Switzerland or make major corporate changes.

Sergio Ermotti

Why such a dramatic step? Because, as some reports suggest (Wall Street Journal, 14 October), UBS fears that heavier capital rules being contemplated by Swiss federal lawmakers will threaten its competitive edge against international rivals. UBS might decide to quit the country, at least as far as its corporate HQ is concerned. (The main picture shows the UBS HQ.)

Even if an HQ move to abroad is unlikely, how might UBS, from a corporate structure point of view, respond if new rules are imposed? Might it separate itself from some international operations? Your correspondent will be Zurich for most of this week, so I will be interested to take views.

At the core of UBS’s worry is that its foreign business lines in key regions such as Asia and North America, are important business drivers. The Zurich-listed group prides itself on a broad, international footprint. It is part of its appeal. At the same time, the “Swissness” of UBS is also a feature, not a bug. The UBS emergency takeover of Credit Suisse in 2023, carried out at the behest of the Swiss authorities, has dented Switzerland’s image but there is plenty of vigour in the country’s banking sector. Switzerland is the world’s second largest centre for cross-border financial services, as stated earlier this year by Boston Consulting Group. (Hong Kong is now the largest.) With political and financial strains in neighbouring European countries such as France, the safe-haven Swiss brand carries appeal.

Some background: In late September, Switzerland's upper house of parliament voted for capital rules that would require UBS, the country’s sole universal bank, to back its foreign units with 90 per cent CET1 capital. The upper house narrowly rejected a proposal agreed by an upper house committee to allow UBS to back foreign units with 50 per cent CET1 capital and 50 per cent Additional Tier 1 (AT1) capital, a cheaper form of asset. Lawmakers would prefer UBS to fully capitalise all its large foreign subsidiaries instead of funding them with borrowed money.

This “90 per cent” proposal will add a cost of $16 billion in extra shares, UBS says. Additionally, the proposed package will load a further $2 billion to the cost. That $18 billion total is an increase of 25 per cent on top of UBS’s current common equity. Banks understandably want to run as lean a business as possible rather than tie up capital in these capital “buffers” where every added amount cuts into return on equity.

The issue has been brewing since UBS bought Credit Suisse. UBS possibly thinks the risk of such heightened capital rules is scant reward for that rescue, and says that the proposed rules are more severe than those facing its rivals. In the minds of lawmakers, however, is the shadow of the 2008 financial crisis and whether, if UBS were to find itself in serious financial trouble, it would be too large for the Swiss taxpayer to bail out. As reported in April 2024, the Federal Council wants systemically important Swiss banks, such as UBS, to hold significantly more capital against their foreign units. UBS, Raiffeisen Group, Zürcher Kantonalbank and PostFinance are deemed systemically important lenders.

Federal parliament in Berne

Reports point to growing calls for change. For example, a report by the WSJ earlier this month said UBS executives are preparing to ditch their Swiss home base. Options being considered include buying a US-based financial institution and relocating, merging with a European rival or selling itself to a US firm seeking to serve wealthy clients. 

It is possible that speculation was partly fuelled by UBS's announcement in March this year that it had secured clearance to convert its US bank, UBS Bank USA, to a nationally chartered bank. However, from this news service’s conversations with UBS in the US, this was more about providing its US-based wealth arm with access to a US-chartered bank under the same UBS banner, and not suggestive of anything more significant.

As of the time of writing, it seems that Ermotti believes it is important for the bank to protect its Swiss HQ. During a CNBC interview on 6 October (source: WSJ), he said he thought that having UBS based in Switzerland was good for the Swiss economy, clients, and shareholders. “But of course we will need to consider what needs to be done in the future in order to preserve and take care of the interests of our shareholders, our clients, but also our people,” Ermotti was quoted saying. However, reports also noted that asset manager Artisan Partners, which owns a stake in the bank, told UBS directors: “The simple fact is that Switzerland is no longer an attractive or desirable location for UBS.”

One option might be for UBS to shift the HQ to its investment bank, typically the most capital-hungry arm of a lender, out of Switzerland, and keep the rest of the business under its Zurich HQ. This may be far preferable to a complete move from a country that, for all the challenges since the demise of bank secrecy for cross-border accounts, is still envied for stability, rule of law and economic strength. But any corporate change will be a difficult act to pull off: management will want to avoid disruptions that will alarm its high net worth and ultra-HNW clientele.

Shares in UBS have risen 0.4 per cent since the start of January. Investors will look for more clarity on this issue before that price can go significantly higher.

To comment, contact the editor, email tom.burroughes@wealthbriefing.com