UBS to Buy Back Bonds Worth $2.37B - Analyst Blog


In an attempt to reduce interest expenses, Swiss bank UBS AG ( UBS ) announced its intention to repurchase bonds worth CHF 2.15 billion ($2.37 billion). The bank will make a cash offer for five subordinated bonds and six senior unsecured bonds. These will be denominated in Swiss francs, euros, pounds and Italian lira.

The deal, which is similar to the company's repurchase of CHF 5 billion of senior debt this year, is likely to cause a marginal loss. UBS' bond buyback comes at a time of stringent capital rules under which the bank will not be able to include the subordinated bonds as capital from 2019, under the Basel III rules. However, the buyback will expectedly lower the company's total capital ratio by 0.2%-0.5%. Notably, at the end of September, the capital ratio of UBS was 21.8%.

The bond buyback program is in tandem with the company's efforts to shrink its balance sheet further and reduce interest expense in the near term. The bank is also striving to maintain strong liquidity, along with a healthy funding and capital position in compliance with regulatory norms.

Given the decline in profits since the financial meltdown, together with trading losses and outrage worth billions of dollars, UBS was forced to downsize troubled segments and develop its core businesses. With economic recovery appearing bleak in the near term, banks have been adopting aggressive cost cuts and other restructuring measures to maintain a sound capital buffer, which will be able to counter the macroeconomic challenges.

The bank also aimed to reduce its risk-weighted assets and simplify the structure of the investment banking division. Following other European banks like Credit Suisse Group AG ( CS ), Deutsche Bank AG ( DB ) and Barclays PLC ( BCS ), UBS has been trimming its investment banking unit since 2011. The company intends to shift its focus back to building its market-leading wealth management and asset management business.

Given the stressed operating environment, we believe a significant improvement in UBS' earnings remains elusive going forward. However, effective business model changes can help improve efficiency and reinforce the company's competitive edge. Currently, UBS carries a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: BCS , CS , DB , UBS

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