UBS GROUP AG had a very profitable first quarter – and that’s a bit of a headache for the Swiss bank.
Analysts are now convinced it will launch another US$3bil share buyback in the second half of financial year 2026, following the one it will soon complete.
But offering such largesse to investors at a time when Swiss lawmakers are debating how much extra capital the bank should hold to protect taxpayers against the risk of failure would be clumsy to say the least.
Switzerland’s biggest lender is in a long-running war of attrition with its government over plans to toughen up too-big-to-fail rules that were a direct response to the collapse of Credit Suisse – and its rescue by UBS – in 2023.
UBS’ strong results risk encouraging lawmakers to think it has deep enough pockets to bear whatever demands they might make.
Nasty fight
The fight has been getting nastier, and it all seems very un-Swiss.
Finance Minister Karin Keller-Sutter last week threatened to undo some concessions she has already handed the bank if parliamentarians go soft on the main package of capital reforms.
This week she also claimed that some politicians aren’t speaking up in favour of her proposals for fear of losing party political funding from UBS.
The bank called the proposals extreme, disproportionate and out of line with international standards and said they don’t even tackle the issues of bad management that brought down Credit Suisse.
The changes could hit the bank with roughly US$22bil in higher capital demands, which could be punitive enough for UBS to quit the country.
A key shareholder claimed this looked a likely outcome late last year.
Sergio Ermotti, holding his 50th earnings call as chief executive officer on Wednesday, seemed to offer some reassurance on that point.
Whatever lawmakers decide “will not change who weare as a firm”, he said.
The bank is committed to all its businesses and locations – and will protect shareholders, he added.
It would also mitigate, if possible, the impact on clients and staff. That “if possible” was deliberate and telling. Lending could shrink and jobs may be lost.
This is all playing out against a storming first quarter for investment banking, markets and wealth management.
The war against Iran has stoked financial volatility everywhere, while not yet undermining mergers and acquisitions or capital raising.
UBS held its own against US rivals slightly better than its European peers in several areas.
In Asia particularly, its equity trading desks and hedge fund lending business could have lost ground to a newly expansive Goldman Sachs Group Inc, but didn’t.
UBS’ global equities trading revenue was up 29% in the first quarter versus the same period last year next to Goldman’s 27% growth.
The US bank made more than double what UBS did in that business, but the Swiss firm is far from getting squished by its larger peer.
UBS’ fees for dealmaking and fundraising grew 30% year-on-year, right in line with the US average, while its small bond and currency trading unit also did well.
Lending and asset gathering in its global wealth arm far exceeded expectations, too.
This all helped boost group net income to just over US$3bil for the quarter, which would be a record in the past decade if not for the extraordinary accounting gain booked on completing the Credit Suisse rescue in the second quarter of financial year 2023.
UBS’ efficient integration of its former rival and the speed with which it has shed unwanted assets and costs from the failed lender have put it in a strong position to keep repeating the trick.
US banking licence
It also now has a US banking licence, which will mainly help it draw in more regular deposits from individual clients in its wealth business there, cutting the cost of its funding and buoying profits from mortgages and lending against stocks and other assets in the United States.
Joseph Dickerson, analyst at Jefferies Financial Group Inc, thinks earnings upgrades will follow – and help the case for even more capital being handed back to investors.
“We have viewed the door being very much open for a new US$3bil share buyback in the second half and have renewed conviction on this following today’s earnings release and conference call,” he wrote.
But that’s where the politics gets grizzly.
UBS has been deliberately cautious about talking about buybacks this year and remains reticent on the topic.
It doesn’t want to poke the bear.
Ermotti said the bank would give details on payout plans when it reports second-quarter earnings in July, based on financial performance and further visibility on the capital debate in Parliament.
Lawmakers are holding an initial discussion on Monday behind closed doors in Bern.
Some sense of direction could emerge informally from that.
Whatever the sentiment among politicians seems to be, UBS is going to have to walk a very fine line in the months ahead between keeping shareholders happy and not riling up Keller-Sutter and its other opponents, who are fearful of the sheer size of their last globally important bank.
This fight could get nastier yet. — Bloomberg
Paul J Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal. The views expressed here are the writer’s own.
