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UBS chief executive Sergio Ermotti might be coming down with a touch of Dimon-itis. This condition sometimes affects those running globally significant banks, who after piling in for the good of the system then start to question why. JPMorgan boss Jamie Dimon has been known to bemoan the flak his bank took after buying beleaguered Bear Stearns during the financial crisis. Critics, in effect, questioned if he’d got too good of a deal.
Ermotti’s growing headache emanates from UBS’s emergency takeover of Credit Suisse last year. Local politicians are already hammering terms which they now see as too generous. That view may not be changed by how well the deal seems to be going: UBS on Wednesday said net profit was $1.1bn in the second quarter, or about twice as much as expected — in part thanks to success in integrating the two banks and shedding non-core assets.
New Swiss “too big to fail” rules — part of the blowback to the deal — are likely to keep a lid on returns over the next few years. That should contain any excitement over shareholders’ probable share of the haul.
The question is just how much equity capital the bank must have in order to protect against future losses. The common equity tier 1 ratio was 14.9 per cent at the end of the second quarter. That is above management’s target of 14 per cent, even with the $1bn of buybacks planned this year. It is also about 3.5 percentage points above regulatory minimums. But these are set to rise in line with the bank’s scale and significance.
Swiss regulators are currently assessing capital levels following the failure of Credit Suisse. Their focus in particular is that current rules for some assets and foreign subsidiaries are too lenient. The result could be a double whammy of inflation in risk-weighted assets and higher capital buffers.
For simplicity’s sake the leverage ratio, which ignores risk weights to calculate capital levels, is a lens to view the potential impact. This is expected to be 4.8 per cent at UBS this year, according to Visible Alpha. Say it were to rise in line with Morgan Stanley’s expected 6.1 per cent, an additional $20bn of CET1 might be needed at UBS. That is only a little less than the expected dividends and buybacks for 2025 to 2027.
The outcome likely won’t be that high. But Swiss regulators, caught napping with Credit Suisse, will want to claim a gold-plated regime for the outsized bank left behind. With wrangling ongoing, the question is to what extent UBS can limit becoming a victim of its own deal’s success.
andrew.whiffin@ft.com
