In an attempt to reduce interest expenses, Swiss bank
) 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.
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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
Deutsche Bank AG
), 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).