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UBS, Credit Suisse See Stricter Capital Requirements


Trades from $3

The Swiss Financial Market Supervisory Authority FINMA set tough capital requirements for the country’s two banking giants – UBS AG (UBS - Analyst Report) and Credit Suisse Group AG (CS - Snapshot Report) to safeguard these two from any further financial downturn. The revised capital requirements are based on year-end figures of 2012.

FINMA requires capital ratio targets for these companies to be achieved by 2019. The minimum capital requirements as a percentage of risk-weighted assets (RWAs) are set at 19.2% for UBS and 16.7% for Credit Suisse. Notably, these are more than double the global Basel III standard of 8%. Further, unweighted leverage ratio for UBS and Credit Suisse are set at 4.6% and 4.0%, respectively.

The figures varied for the companies as the targets were determined on the basis of their size and domestic market share. Notably, FINMA indicated that Credit Suisse has a lesser market share in the domestic credit business.

The capital requirements came as part of the "too big to fail" provisions. Notably, during the crisis, the Swiss banking system was shaken when UBS reached the brink of bankruptcy that consequently forced the government to bail it out with $60 billion.

After incurring loss in 2012, UBS swung to profit in 2013. The company continued to exhibit efforts in strengthening its fundamentals as it reported impressive first-quarter 2014 earnings. However, driven by decreased trading revenues and higher provision for credit losses, Credit Suisse posted dismal earnings.

In Conclusion

We believe the latest enforcement by FINMA will put some pressure on the top line of these banking giants in the short run, but it will make them sustainable in the long run. Anyway, amid several litigation issues and several internal inefficiencies, these banking giants are thriving hard through their restructuring initiatives that focus on building capital levels, achieve operational efficiency, and reduce RWAs.

Currently, UBS holds a Zacks Rank #4 (Sell) while Credit Suisse carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the foreign banks space include India-based ICICI Bank Ltd. (IBN - Analyst Report) and Argentina-based Banco Macro S.A. (BMA - Snapshot Report). Both the stocks carry a Zacks Rank #1 (Strong Buy).