UBS predicts RWA cuts hampered by Basel III, model updates

Planned wind-down of unwanted Credit Suisse assets to be offset by $25 billion in add-ons

UBS anticipates its projected reduction of risk-weighted assets (RWAs) from offloading unwanted Credit Suisse exposures will be undermined by the impacts of Basel III regulations and converting Credit Suisse’s risk models to the UBS standard.

The Swiss megabank predicted in its fourth-quarter results that RWAs will fall on aggregate by around $35 billion over the next three years from $547 billion at the end of 2023. The decline was projected to be driven primarily by winding down $45 billion of the $72 billion of RWAs in the non-core and legacy (NCL) portfolio, the unit created to house unwanted assets acquired with Credit Suisse in June last year.

 

This will be offset, however, by $15 billion of extra RWAs from the implementation of the final Basel III regulations slated to come into effect on January 1, 2025. UBS also stated that the finalisation would be responsible for an additional $10 billion of RWAs added to the NCL portfolio at the start of 2025. These would be eliminated by the end of 2026.

A further $14 billion of RWAs were forecast to be added to the group’s core businesses as a result of updating Credit Suisse models to fit UBS standards. After taking into account all model updates over 2024–2025, the final impact was $10 billion.

On the other side of the ledger, UBS outlined that core business growth over the three years to end-2026 would be offset by balance sheet optimisation to the tune of a $15 billion reduction in RWAs.

What is it?

UBS completed the acquisition of failed Swiss bank Credit Suisse on June 12, 2023.

On November 29, 2023 the Swiss Federal Council adopted the final implementation of the Basel III reforms, which are scheduled to take force on January 1, 2025.

Why it matters

UBS’s chief financial officer, Todd Tuckner, told analysts on February 6 that the $15 billion Basel III add-on came primarily from changes to credit risk, credit valuation adjustments and the Fundamental Review of the Trading Book, which sets out rules around the modelling of market risk.

This illustrates the impact of the final Basel III reforms, which will be felt across the globe after regulators in the second half of 2023 set firm deadlines for implementation. 

The $14 billion RWA hit from converting models, meanwhile, is an indication of the difference in rigour between the two banks’ risk management processes, and a reminder of the pitfalls awaiting the rescuers of failed banks.

UBS predicts $13 billion in integration costs over the next three years and that, as CEO Sergio Ermotti put it in the call with analysts: “The non-core and legacy portfolio will continue to be a meaningful drag on our results as it is actively unwound.” Therefore the $35 billion RWA reduction, with its accompanying $5 billion release of Common Equity Tier 1 capital, would mark a success in offloading Credit Suisse’s most toxic assets. But if and when that day comes, Basel III regulations and model updates will still have made their presence felt.

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