In what comes as the latest roadblock in the recovery of Swiss banking giants UBS (NYSE:UBS) and Credit Suisse (NYSE:CS), Swiss lawmakers are contemplating a move to separate these banks’ investment banking operations from other essential operations.  Both banks have been hard at work revamping their business models for the last couple of years to comply with Swiss regulatory requirements for banking institutions.
UBS in particular has shifted its focus back to wealth management and let go of as many as 10,000 investment bank jobs to shrink its fixed-income business to a fraction of its former size (see UBS Enters 2013 Revived Following Transformative Year). Quite recently, the bank also announced its decision to pay off the Swiss National Bank (SNB) for the remaining equity in the StabFund (stabilization fund) created as a bail-out mechanism for UBS in the aftermath of the economic downturn of 2008.
But the growing talks among legislators of splitting the Swiss banks would be a big step backwards as it casts a shadow of uncertainty over their future in a manner similar to what has been witnessed in the case of RBS (NYSE:RBS) over recent months. Not only will a split entail billions in one-time expenses, but the banks will also be unable to provide customers the end-to-end financial services they currently offer – potentially diminishing future growth prospects for the separated entities.
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The two largest Swiss banks have put in considerable effort over the recent years to shore up their balance sheet with both banks overlooking the short-term performance of their business units for several quarters in the recent past to ensure compliance with stringent capital requirements mandated by Swiss regulators. Swiss regulatory requirements for the country’s biggest banks are the strictest among those imposed by financial regulators around the globe. And it was only in the last quarter that all the hard work the banks put in began to show results even as they fortified their balance sheets enough to be ranked among the world’s best capitalized banks. In fact both UBS and Credit Suisse are well on their way to fulfill the fully-applied Basel III capital requirements slated for 2019 as early as next year.
But Swiss lawmakers don’t seem to believe these measures are adequate to ensure that the banks can weather another economic downturn. They want to be absolutely sure that the banks which symbolize the country’s financial sector don’t need a bailout ever – even if it means that the banks be broken up to separate their risky investment banking operations.
Such a move does not gel well with the efforts the banks, UBS in particular, have put in to reduce the importance of investment banking in their business model. As understood from the chart above, investment banking operations which include equity & bond sales and trading as well as advisory and underwriting services make up just about 30% of the bank’s total value – well below the nearly 50% they contributed towards even in 2011.
We will be watching the developments in this regard closely over the coming months, as a move to split the banks would considerably reduce the revenue potential of the banks due to additional capital costs.Notes: