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There’s an old joke about how the Swiss have four languages and no intention to be understood, so when required to speak to outsiders they prefer to vandalise a fifth. Keep it in mind while reading this disclaimer now attached to Credit Suisse research:
As a result of the recent merger with UBS Group AG, we have refined our multi-asset class investment perspectives to now form our combined House View. Unlike in the past, when our investment perspectives were formed exclusively by the analyses of our investment strategists and research analysts, we have adopted an integrative approach and expanded our intellectual horizon, moving from 3 to 6 months to 12 months. In our ongoing effort to provide the highest quality insights, the new trajectory of investment views will be crafted by the confluence of knowledge from both UBS and Credit Suisse investment professionals. This amalgamation of expertise is intended to enhance your understanding and provide you with an even more robust and diverse lens into the ever-evolving investment landscape.
We look forward to sharing this refined perspective with you, and we appreciate your continued readership and engagement.
An antidote to all those words comes from Twitter’s Dan Davies, who has an excellent op-ed in today’s MainFT on Switzerland’s approach to banks regulation. When you’re a state-backstopped nation of bankers that’s down to its last G-Sib, there’s not much point in mucking around with the definitions of regulatory capital, he says:
[E]ven under the existing rules, Credit Suisse managed to survive a bank run that lasted from the end of last October to the start of March. If four months was not enough time to turn things around, what real benefit is there in providing resources to extend it to five or six?
The real problem — and the one that is most psychologically intolerable for bankers and regulators alike — is that when the shit really hits the fan, there is nothing at all that can save a bank.
Switzerland signed its too-big-to-fail regulations into law in 2013 then began fiddling almost immediately — most notably with the Aymo Brunetti report published a year later that significantly strengthened leverage ratio requirements. The reasoning then was that Switzerland’s two systemically important banks were oversized relative to GDP, so needed wider buffers than the European norm.
In that context, the UBS-Credit Suisse merger has set Switzerland back by a decade. Its only remaining globally significant bank is bigger now than it was in 2012, and is approximately three times the size of the one that proved too big to fix. Chart via Barclays:
A thing investors have been telling themselves recently is that within a couple of years, UBS will be normal again. Management’s target of making the CS merger EPS accretive by 2027 has been lowballed, they reason, because who wouldn’t want to park money in a ward of the Swiss state?
For that reason UBS shares have kept trading at a premium to the peer group based on the 2025 forecasts:
The above chart is from Morgan Stanley, which puts forward the fine-by-2025 theory in a note published today. It argues that wealth management will have grown to $4bn in AUM by that year, while core operations will be rightsized as most of the Credit Suisse markets business will be run off, so reparations can begin for UBS equity holders:
A quick rebuild of capital buffers is a virtuous cycle, not least because it removes the need to raise money from a spinoff or IPO of CS Schweiz, the local bank UBS inherits from Credit Suisse. That’s great for earnings and bad for optics: on a pro forma view UBS is now the biggest Swiss domestic bank by far, with more than a quarter of loans and deposits. Local dominance may be politically awkward when it’s sacking lots of Swiss citizens.
Morgan Stanley’s model is based on UBS retaining CS Schweiz while finding $10.5bn of cost savings (notably higher than management’s $8bn guidance). Finish the job by 2025 and there’s enough spare capital swilling around to fund $9bn of share buybacks over the next two years, it estimates:
It’s plausible in theory — though Credit Suisse AT1 bondholders might not appreciate cash being given to UBS shareholders less than three years after their own wipeout. The analysis also presumes no further step up in capital requirements, which given recent history seems brave.
On the one hand, as Davies says, a capital ratio is no protection when shit is hitting the fan. On the other hand, demanding fatter capital ratios is pretty much all a regulator can do in a hurry.
Brunetti wrote last month that while waiting for global agreements on the way forward, countries with oversized banks should “seriously consider taking earlier actions such as significantly higher capital requirements for transactions that endanger global resolvability”:
Given the internationally record-breaking size of Switzerland’s largest bank in relation to GDP, the country simply cannot afford an UBS with a state guarantee. Larger countries might have the fiscal means to do this but subsidising global banks is an especially inefficient and unfair policy.
Regulator Finma has said (in typically tortured English) that UBS has until 2030 at the latest to comply in full with current capital requirements. There’s also a post-CS independent review of the regulatory framework due for delivery to the Swiss parliament within the next 12 months.
In these circumstances it’s heroic to believe that UBS can complete the integration of a globally significant basket-case five years early then begin throwing off cash, without also inviting capital criteria to be toughened further. Any investor holding the shares on that basis is encouraged to go back and read that CS-UBS research disclaimer again, if only for a reminder that what’s said in Switzerland can be poor guide for outsiders about what’s really happening.
Further reading:
— And Europe’s best-capitalised bank is . . . (FTAV)
— The rise and fall of the bank that built modern Switzerland (FT)
— Why bank capital has a problem (FTAV, 2017)