UBS has become too big to fail, and this cannot be denied: we are obviously referring to the new UBS, the one created by merging with Credit Suisse, which now has a balance sheet larger than Switzerland’s annual GDP. Even the largest U.S. banks in 2008 were “too big to fail,” but none of them had a balance sheet larger than the U.S. economy. Of course, the crisis was widespread, involving them all and creating a systemic risk. But UBS’s situation represents, in numbers, a systemic risk for Switzerland as well.
But why should we care about UBS? There are several reasons, but the spotlight is on capitalization. After successfully pocketing (about 29 billion dollars) the proceeds from the biggest deal of the century – the extremely favorable acquisition of CS – the Swiss legislator is now asking UBS for stronger capital requirements, essentially a capital increase of about 25 billion dollars to raise the Tier 1 ratio from 14% to 19%.
It should be noted that these “requirements” will come through regulation (which means in three years) and not through executive measures (and thus quick applicability). In the meantime, UBS, which has already successfully completed the migration of accounts to its platform for customers from Luxembourg, Hong Kong, Singapore, and Japan, will have plenty of time to complete all planned cuts, including liquidating Non-Core and Legacy (NCL) assets, which are already proceeding faster than expected. It is worth mentioning that the roughly 7 billion dollars in savings expected by the end of 2024 have been achieved, and the 13 billion dollars expected by the end of 2026 are already 60% complete. Certainly, the toughest challenge begins now: migrating about one million Swiss retail customers to the new platform. But remember, this goal must be reached by 2026; at least that was in the plans.
Despite all these positive aspects, UBS’s shareholders (at least the most significant ones) are very concerned. Primarily because the growth prospects for wealth management activities seem difficult to achieve (5 trillion dollars by 2028 and an increase of 100 billion dollars in new net assets per year by 2025), and also because UBS seems destined to lose the competitive battle with the largest U.S. investment banks, which are its natural competitors, thus relegating UBS to the rank of “European” bank: it is believed this may mainly be due to capital requirements that are too demanding to meet.
We haven’t said it, but we should remind you that UBS – heavily fined by U.S. authorities – was supported by Swiss taxpayers in the years following the 2008 crisis. Additionally, we cannot hide that the cuts already made and those still to come affect the workforce, which was 120,000 (combining UBS and CS employees) globally before the merger and has now dropped to 109,000, with a projected reduction to 85,000 by the end of the integration process, which is expected by the end of 2026. For Switzerland alone, a cut of 3,000 units is anticipated.
Disclaimer: This article expresses the personal opinion of the contributors at Custodia Wealth Management who wrote it. It is not investment advice, personalized consulting, and should not be considered as an invitation to engage in transactions involving financial instruments.
