Top UBS Investor Artisan Partners Tells Bank to Quit Switzerland Over New Capital Rules

Since Switzerland's upper house approved a 90% Common Equity Tier 1 capital requirement for UBS's foreign subsidiaries in late September, the bank's standoff with its home regulator has pulled in one of its own shareholders.

Artisan Partners, a US asset manager that says it manages more than 60 million UBS shares through its Global Value Team and International Value Group, sent a letter to UBS's board that was published late on Wednesday, according to Reuters. Artisan called the proposed capital rules "punitive" and argued they would destroy shareholder value without generating any return. The firm's conclusion: "Switzerland is no longer an attractive or desirable location for UBS."

Artisan is a top-20 investor in UBS, according to LSEG Workspace data cited by Reuters. The letter is significant because it comes from a major shareholder telling the bank's board, in writing, to consider leaving the country where UBS is based.

What the rule actually does

The plan, adopted by Switzerland's upper house last month, requires UBS to back 90% of the value of its foreign units with CET1 capital. That is softer than the Swiss government's original proposal, which called for 100% backing. UBS says even the 90% figure would force it to hold roughly $16 billion in additional CET1 capital, according to the Business Times Singapore and Global Banking and Finance Review.

Artisan's letter went further, estimating that without the stricter rules, that capital could generate an annual return of about 15%, equivalent to an extra $2.4 billion in net income. Valued at 15 times earnings, Artisan said that would equate to about $36 billion in lost market value, or around 23% of UBS's current market capitalization, according to Global Banking and Finance Review.

RBC analysts Anke Reingen, Sherry Lin and Susana Cruz estimated in a September 28 note that the plan would cut UBS's earnings per share by 9% compared with today's setup, assuming UBS trims its stock of AT1 junior debt. The analysts called the outcome "close to the worst case," according to the Business Times Singapore and Briefs.

UBS's response

UBS has said its goal is to keep operating successfully as a global bank from Switzerland, and it would advocate for regulation that is "targeted, proportionate and internationally aligned," according to Global Banking and Finance Review. That is a notably softer public line than Artisan's.

UBS Chairman Colm Kelleher warned before the upper house vote that unduly harsh regulation could force the bank to reconsider its future in Switzerland. Semafor reported that UBS has revived internal discussions about structures to move out from under Swiss oversight, including a potential combination with another large international bank. RBC's analysts wrote they do not believe selling itself or parts of its operations is UBS's preferred option, and they don't expect any disclosure to the market before the rules are finalized.

The other side of the argument

The capital rules stem from the banking overhaul triggered by Credit Suisse's 2023 collapse, when UBS absorbed its failed domestic rival. Swiss officials pushing the capital rules argue that if UBS is too big to fail, it needs enough capital to actually not fail, rather than relying on another emergency bailout.

Swiss Finance Minister Karin Keller-Sutter said she believes it is unlikely the bank would actually leave Switzerland, according to Global Banking and Finance Review. Her position represents the government's bet that UBS's threats are leverage in a legislative negotiation, not a serious relocation plan.

Both arguments deserve a fair hearing. Artisan's shareholders have a legitimate gripe if $16 billion in trapped capital generates zero return and drags down earnings by 9%. But Swiss taxpayers backstopped Credit Suisse's failure once already, and a government betting the house on UBS's goodwill after that experience is not an unreasonable instinct either.

What happens next

A committee in Switzerland's lower house takes up the file next, with debate and a possible vote expected during its October and November sessions. The full lower chamber is then expected to debate the overhaul, likely during its winter session running November 30 through December 18, according to the Business Times Singapore.

Some lawmakers have floated a softer compromise, setting CET1 backing at 75% instead of 90%, according to the Swiss paper NZZ. If the upper and lower houses pass different versions, the bill bounces between chambers until they converge on a compromise.

No merger, relocation, or domicile change has been announced. UBS has not confirmed any specific plan to leave Switzerland, and Keller-Sutter has publicly downplayed the odds of that happening. The open question is whether Bern's lower house, which RBC's analysts note has a different party composition than the upper chamber, moves toward Artisan's position, toward the government's original 100% plan, or lands somewhere in between before the winter session wraps up in December.