UBS Could Achieve Major Savings with Revised Swiss AT1 Capital Proposal
By Oliver Hirt and Ariane Luthi
Potential Impact of Swiss AT1 Capital Proposal on UBS
ZURICH, Sept 15 (Reuters) - UBS could save hundreds of millions of dollars a year, investors said, if lawmakers approve an alternative proposal for Additional Tier 1 bond use as part of an overhaul of Swiss banking laws after the collapse of Credit Suisse.
Although the proposal being considered in parliament would tighten existing rules for AT1 bonds, it would not be as costly as the government's plan, which envisages UBS meeting new requirements with Common Equity Tier 1 capital.
Background: UBS and Swiss Government Disagreements
UBS has been at loggerheads with the government since Finance Minister Karin Keller-Sutter proposed it hold around $20 billion more in CET1 capital to fully back its units abroad.
A parliamentary committee last month passed a compromise that would instead let UBS use another $13 billion in AT1 after lobbying by Switzerland's only remaining global bank, which bought Credit Suisse in a state-engineered takeover in 2023.
Understanding AT1 and CET1 Capital
AT1s are a form of regulatory capital ranked just below CET1. While CET1 absorbs losses immediately, AT1 bonds can be written down or converted into equity in a crisis.
Market Reactions and Investor Perspectives
"The proposal to use 50% core capital and 50% AT1 bonds is a victory for UBS," said Filippo Alloatti, head of financials on the credit team at investment company Federated Hermes, which holds UBS AT1 bonds.
"It would be an irony of history if Switzerland gave AT1 bonds a greater role even though it concluded that the instruments are not crisis-proof," Alloatti told Reuters.
The write-off of 16 billion Swiss francs ($19.6 billion) in Credit Suisse AT1 bonds helped pave the way for the UBS takeover of its old rival, although the stricken bondholders have since engaged in a lengthy legal campaign to recoup losses.
Supporters say AT1 bonds help stabilise banks in difficulty, but Swiss regulators say they are not as secure as CET1 capital.
UBS said the committee's proposal would provide more clarity on how AT1 instruments operate, and bring Switzerland into closer alignment with European Union and British standards.
The Swiss finance ministry declined to comment on the proposal, which lawmakers say stands a good chance of being passed by the Swiss upper house when it is debated on Thursday, although it may face a tougher reception in the lower chamber.
Cost Implications of the Proposal
Cheaper Than CET1 Despite Additional Trigger
To ensure AT1 capital can absorb sufficient losses in a crisis, UBS should be forced to suspend investor payouts, stop share buybacks and reduce bonus payments if its CET1 ratio falls below the required level, the committee said.
Unless the bank rebuilt its capital base within six months, it would have to take further measures, such as a capital increase and an offer to exchange or convert AT1 bonds.
The changes would make the debt somewhat more expensive, likely upping what UBS must pay investors on 10-year AT1 bonds by 25 to 50 basis points to around 7%, Alloatti said.
However, holding CET1 would imply a cost of around 9% to 10%, so that using $13 billion in AT1 debt instead could save UBS several hundred million dollars annually, he added.
Industry and Analyst Responses
While UBS CEO Sergio Ermotti praised some lawmakers for their efforts, he said "extreme" proposals remained in play and UBS has said the proposals would still add significant costs.
Luca Evangelisti, an investment manager at Jupiter who holds UBS AT1 bonds, said the premium on new AT1 terms should be fairly small, noting their spreads widened only slightly in the days after the parliamentary committee's announcement.
Its proposal, if approved, would be significantly less expensive for UBS than the government demands, he said.
Timeline for Final Decision
A final decision on the capital rules could be reached at the end of this year, but is more likely in 2027.
(Reporting by Oliver Hirt and Ariane Luthi;Editing by Dave Graham and Alexander Smith)
