New Swiss rules may force UBS to review global franchise, curb buybacks

UBS Group AG may need to reassess the operations of its big foreign subsidiaries and reduce shareholder distributions in the future due to new capital requirements in Switzerland.

If adopted as outlined by the Swiss Federal Council on June 6, the new rules would require UBS to hold up to $26 billion in additional common equity Tier 1 (CET1) capital at its home-based parent bank, the bulk of which would be used as a buffer against potential losses at international units.

"This might increase UBS' cost of capital and potentially place it at a significant competitive disadvantage both globally and domestically, absent a change in its strategy or other mitigation," S&P Global Ratings said in a June 9 commentary.

UBS has said the new requirements are "extreme" and will raise the total additional CET1 capital it is required to hold to $42 billion, including a buffer it has already had to set aside due to its acquisition of Credit Suisse.

"We're disappointed, certainly, because we think ultimately, if that framework were to come to pass, it would be misaligned with international standards and clearly would be disproportionate," UBS CFO Todd Tuckner said at the Goldman Sachs European Financials Conference on June 11.

Capital distributions

A significant increase in capital requirements may constrain UBS' financial flexibility to distribute capital to its shareholders, said Vitaline Yeterian, senior vice president global financial institutions at Morningstar DBRS, in a written comment.

The fact that UBS has reaffirmed its initial commitment to a 10% increase in ordinary dividends and $3 billion in total share buybacks for 2025 suggests it sees "some room to maneuver to alleviate the blow" in the years before the rules take effect, Yeterian said.

As of now, the implementation of all new rules is expected to start in 2027 at the earliest, with a phase-in period of six to eight years for the requirements for foreign subsidiary capital, according to the Swiss Federal Council's proposal. Most changes must be approved by the Swiss parliament before adoption starts.

If invited, UBS will participate in the political process addressing foreign subsidiary capitalization, Tuckner said. The group believes that if the decision-makers "have the facts and undertake a cost-benefit analysis, we can get to an outcome that's more proportionate," the CFO said.

The new Swiss regime alters UBS' original plan to raise shareholder distributions in 2026, when Credit Suisse would be fully integrated, above the amount paid out in 2022, the year before the unit was acquired, Tuckner said. "In terms of what we'll do in 2026, we will articulate that early next year with our fourth-quarter 2025 earnings," the CFO said.

Current consensus estimates still show an increase in UBS' dividend and share buyback amounts in the 2025–2027 period, according to data from Visible Alpha, a part of S&P Global Market Intelligence. Yet the total payout ratio, measuring the share of profits the group distributes via dividends and buybacks, is set to decline, the data shows.

Buybacks on the line

Based on current estimates, UBS can sustain dividend payments while building up additional capital over the next couple of years, said Anupam Tripathi, senior operations analysis specialist at Market Intelligence's Dividend Forecasting team. Group profits are seen ranging from $5 billion to $11 billion in 2025 to 2027, with dividends expected at $3 billion to $4 billion annually over the period, Tripathi said.

"However, the capital buildup will necessitate greater profit retention, which may limit further dividend growth and particularly affect share buybacks," Tripathi told Market Intelligence.

Vontobel analyst Andreas Venditti made similar observations regarding the new Swiss requirements, saying in a note that UBS would be able to raise the additional capital but at the expense of buybacks.

"I don't think there's any chance that in the near term, UBS will return to the sort of $5 billion of share buybacks which was the case before Credit Suisse [was acquired]," Johann Scholtz, senior equity analyst at Morningstar, told Market Intelligence in an interview.

JPMorgan analyst Kian Abouhossein has reduced projections for UBS' buybacks to $3.5 billion from $6 billion for 2026 and to $4 billion from $8 billion for 2027, with Goldman Sachs analysts making similar cuts, Bloomberg News reported June 10, when UBS' shares dropped by over 7% amid market worries over shareholder returns.

Future strategy

"We have a lot of confidence in our strategy, and we're reluctant to back down from that," Tuckner said at the June 11 conference, noting that UBS has "a balance sheet for all seasons" and that the Credit Suisse integration is on track.

Yet the higher requirements would put UBS' global competitiveness under pressure, especially with other jurisdictions easing rules, necessitating changes, Venditti said. Over the medium term, this could lead to strategy or business model shifts, divestments or even a split-up, the analyst said.

While a shift in strategy at UBS is not the main scenario at this point, the group is currently winding down its noncore and legacy division and could also consider selling additional assets to alleviate the impact of the new treatment of foreign participations, Yeterian said.

Global business will get more costly for UBS as the new rules will oblige the bank to back up 100%, instead of just 60%, of its foreign subsidiaries' carrying value with CET1 capital. That will shift the economics of many loans and transactions the group books on the balance sheet of its US investment bank, for example, Scholtz said.

"Almost automatically, I would assume that you're going to start doing less business on that balance sheet and ... reducing the portion that comes from the US balance sheet," Scholtz said.

Among UBS' significant regulated subsidiaries as outlined by the group, UBS Americas Holding LLC is the largest one by assets, outside Switzerland and excluding legacy Credit Suisse operations, Market Intelligence data shows. The group's subsidiaries in the US and Europe outside of Switzerland show a higher capitalization than Swiss-based units, with CET1 ratios of over 20%, the data shows.

UBS could decide to upstream capital from the overcapitalized foreign units to the Swiss parent bank to help meet the new regulatory requirements, Scholtz said. UBS has estimated about $5 billion of potential capital repatriations in its impact assessment of the new Swiss rules.

The banking group does not have much leeway to negotiate with parliament in the upcoming consultation process, according to the analysts. Initial statements from the main political parties indicate parliament is unlikely to ease the rules, Venditti said.

Considering UBS' asset size and the debacle around Credit Suisse, it is likely that the Swiss Federal Council and Swiss authorities will continue to push for higher capital levels, Yeterian said.

UBS' roughly $1.5 trillion of total assets is well above Switzerland's five-year average GDP of $844 billion, Morningstar DBRS estimates show.

– Access a breakdown of UBS' Basel III/IV capital metrics on S&P Capital IQ Pro. – Click here for the latest edition of FinReg Europe, a monthly overview of essential banking regulation news.