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Investing.com -- Shares in UBS Group AG (NYSE:UBS) (SIX:UBSG) fell 5% in Zurich after Bank of America downgraded the stock to Underperform from Neutral, raising a question whether the European lender is "too big for Switzerland."
BofA also trimmed its UBS price target to CHF28 from CHF33.
The bank’s analysts cited impending regulatory changes and the associated uncertainty as primary factors for the revision. A public consultation on the new regulatory framework is expected to begin in May, but the implications are anticipated to linger.
The analysts estimate that UBS may face approximately $20-25 billion in new capital requirements, which are now expected to be fully accounted for against the bank’s Common Equity Tier 1 (CET1), rather than being partially offset by Additional Tier 1 (AT1) capital.
This could result in “an even more uneven playing field vs. peers,” BofA analysts said.
Currently, UBS trades at around 10x its projected 2027 earnings, which is only a slight discount to Morgan Stanley (NYSE:MS), despite UBS’s lower return on CET1 capital of about 15%.
The legislative process in Switzerland could introduce full deduction of foreign subsidiaries from capital, leading to the substantial capital need.
A lengthy grandfathering period is expected as the legislative process may not conclude until 2027. Moreover, the possibility of a referendum, which could overturn the law if a majority of Swiss voters reject it, adds to the uncertainty.
“To challenge a new law, Swiss citizens can collect 50,000 signatures within 100 days of its publication. If they manage to do this, a referendum is held. And if a majority of the voters reject the law, it is cancelled,” analysts explained.
They also pointed to challenges in UBS’s Personal & Corporate (P&C) banking segment, particularly with IT integration risks and the negative impact of near-zero interest rates on profitability.
The bank is in the process of migrating 1 million clients and 95 petabytes of data, which carries significant operational risks. Analysts at BofA foresee operating headwinds and are approximately 9% below the consensus estimates for UBS’s earnings from 2025 to 2027.
Lastly, the report mentioned that relocating UBS’s headquarters out of Switzerland would be considered a last resort. Such a move would be complex, especially for a Swiss wealth manager with the country’s longstanding international ties and history of neutrality.
Before contemplating re-domiciliation, BofA notes UBS might explore other measures such as enhancing its capital-light investment banking model, limiting resources allocated to it, or disposing of assets to optimize foreign holdings.