UBS Shares Decline: Factors Beyond Trump and Trade Wars

The UBS stock has experienced a significant downturn, particularly during the recent fluctuations in the stock market. This decline can be attributed not solely to external factors like geopolitical tensions and trade disputes but also to internal issues regarding capital adequacy.

During the week following the announcement of new tariffs by former President Trump, UBS shares plummeted over 17%. While European bank stocks faced similar pressures, the Stoxx Europe 600 Banks index remains positive for the year, in stark contrast to UBS, which has seen its stock value drop by nearly 20%. Although UBS shares are still above the levels recorded during the Credit Suisse rescue in March 2023, their performance has stagnated since last year.

As the only remaining major Swiss bank, UBS heavily relies on robust stock performance. Company executives often refer to the stock capital as the first line of defense; in times of trouble, shareholders are expected to bear the financial burden. However, the current state of UBS shares is concerning, not due to operational shortcomings--where the integration of Credit Suisse has progressed smoothly--but rather due to ongoing political discussions and regulatory pressures surrounding future capital requirements.

These uncertainties are compounded by the chaotic trade policies under Trump, with no resolution on capital regulations expected until late 2027. The Swiss finance minister has opted for a parliamentary approach to address these issues, and a legislative proposal is anticipated to be presented for public consultation in May 2025.

The debate over UBS's capital structure has also garnered attention internationally, particularly after the bank's annual report was released in February. Analysts are now predicting a potential capital shortfall of approximately 20 billion Swiss francs, which could necessitate full capitalization of foreign subsidiaries. This would elevate the core capital ratio from 14.3% to over 18%, positioning UBS as one of the best-capitalized international banks.

However, what may be favorable for Swiss regulators poses challenges for foreign investors. This sentiment was evident following the recent earnings presentation, where UBS shares fell nearly 7%, and expectations for stock buybacks were significantly downgraded. Investors favor stock buybacks and dividends as they represent a return of capital, but UBS's plans for a 3 billion Swiss franc buyback program are contingent on forthcoming capital regulations. The bank's previous buyback efforts reached 5.6 billion dollars in 2022, but there are doubts whether they can achieve similar levels this year amid persistent political scrutiny.

The details of the new capital regulations are expected to be revealed in May during the public consultation phase. In the meantime, UBS continues to operate effectively while striving to keep shareholder sentiment positive. Analysts suggest that the bank could potentially increase capital distributions, yet this remains constrained by regulatory expectations.

Despite ongoing costs related to integration, UBS is focused on building capital and reducing its balance sheet. While stock buybacks are often interpreted as a sign of financial strength, they could also indicate that capital is being used efficiently. However, the Swiss authorities may not view efficient capital allocation as a valid reason for lowering capital requirements.

What would an 18% capital ratio mean for stock performance? Would shareholders sell off their shares? Analysts suggest that UBS could maintain its current structure even with a higher capitalization, although it could place the bank at a competitive disadvantage. To mitigate this, UBS might consider restructuring its corporate framework to ease capital allocation and regulatory burdens, potentially benefiting from a U.S. holding company in light of evolving trade policies.

Stricter regulations in Switzerland could disadvantage UBS relative to American banks, potentially leading to a diminished valuation of its stock. Currently, UBS shares are valued at a price-to-book ratio of 1, making them approximately 30% cheaper than their competitors. Furthermore, it is essential to compare UBS not only with universal banks but also with global wealth management firms, which are valued significantly higher.

In summary, UBS faces a challenging path ahead in regaining its competitive edge, particularly as uncertainty surrounding capital regulations is not expected to dissipate until late 2027. Investors typically dislike uncertainty, yet a prolonged negotiation period might foster greater understanding of the bank's position. As UBS continues to navigate these complexities, its lobbying efforts are likely to persist.