UBS announces SGD NC5.5 AT1 perps at IPG of 6.125%

Important Events

UBS Group AG (UBS) plans to issue new AT1 SGD NC5.5 perpetuals at an initial price guidance (IPG) of 6.125%. It is available only for accredited and institutional investors.

UBS has issuer ratings of A3 (Positive) from Moody’s, A- (Negative) from S&P, and A (Stable) from Fitch. The bond is expected to have credit ratings of Baa3 from Moody’s and BBB- from Fitch. Proceeds from this new issuance will be used to augment the regulatory capital base of UBS.

Financial highlights and outlook

(All dollar values in USD unless otherwise stated.)

We recently did an article in December 2023 reviewing UBS’s first full quarter of results (3Q23) post-acquisition of Credit Suisse; investors who are interested in a deeper analysis can read our December article linked below. In addition, we also published an article earlier this month explaining upcoming AT1 regulatory changes which investors should also be aware of.

Related article: Idea of the Week: Banking on UBS bonds to deliver yields of over 6%
Related article: Should you invest in AT1 bonds now?

Following this, we now provide a quick review of UBS’s 4Q23 and FY23 results, and our thoughts on this new AT1.

On a reported basis, 4Q23 revenues saw a slight QoQ decline (-7%) to $10.8b (3Q23: $11.7b), though it still marked a sharp YoY increase (+35%) from the previous year (4Q22: $8.1b). Similarly, reported operating expenses in 4Q23 also saw a slight QoQ decline of -1% but a sharp YoY increase of +88% to $11.5b, with integration-related expenses in particular moderating but remaining elevated (3Q23: $2.0b / 4Q23: $1.8b).

On an underlying basis (i.e. excluding temporary or one-time effects), we saw similar trends. 4Q23 underlying revenues also saw a slight decline QoQ (-3%) and a sharp increase YoY (+31%). 4Q23 underlying operating expenses however rose +1% QoQ. Overall, UBS remained in the red, with a net loss of -$279m in 4Q23 (3Q23: -$715m).

As a whole, these results were broadly in line with what we had expected. The slight revenue decline QoQ was not too far off from our prior expectation that any revenue growth would likely be modest post-Credit Suisse (CS) acquisition, and is currently not a major concern for us unless we observe a sustained decline over multiple quarters. Meanwhile, we also expected integration-related expenses to continue being a major driver for costs (including operating expenses) this year.

Nonetheless, we continue to see some bright spots for UBS, especially on the costs front looking ahead. For integration-related expenses, management also estimates about $13b for those in total (by end-2026), of which 33% has been incurred in 2023, and another 34% or so expected in 2024. Considering we have only had two full quarters of integration this year, we expect such integration-related expenses to moderate downwards slightly over the coming years, once again reducing the headwinds on profitability. In terms of total cost savings, UBS expects to deliver $13b in gross cost reductions by 2026 (with only about 30% achieved so far, leaving $9b+ remaining). With these in mind, we continue to see a decent outlook for UBS, though execution risks (of the acquisition) will likely remain elevated until we get more clarity closer to 2025 and 2026.

Credit highlights

UBS reported a CET1 ratio of 14.5% in 4Q23, fairly similar to the previous quarter’s reading (3Q23: 14.4%), and also in line with its medium-term guidance of 14%. This continues to have a solid buffer over the current regulatory minimum of 10.62%, even after we consider the potential for a higher capital buffer requirement (by 50bps) coming in 2025, and management’s illustrative CET1 requirement of about 12.4% by 2030.

Similarly, its 4Q23 going-concern capital ratio (including AT1s) remained healthy at about 17%, above the regulatory minimum of 14.92%. Total loss-absorbing capacity (TLAC) increased slightly to $200b (3Q23: $195b), giving it a TLAC ratio of 36.6%, once again well above the regulatory minmum of 25.64%. Moving forward, management intends to build up its AT1 capital, as it expects requirements to gradually increase to 2030 (similar to the case for CET1) too.

Overall, we think UBS retains fairly healthy capital buffers over regulatory minimums, and currently see a low probability of them falling below these regulatory levels in the near term.

Thoughts on new issue

This new issue’s IPG of 6.125% is significantly higher than its existing UBS 4.850% Perpetual Corp (SGD)’s yield-to-next-call of 5.21%, though there are several important caveats including: (i) the latter perpetual has just 0.8 years to next call compared to this new issue’s 5.5 years; and (ii) this new issue’s final price guidance (FPG) is likely to come in below the IPG of 6.125%.

As we have highlighted in our recent AT1 article linked above, we continue to emphasise certain risks associated with these type of bonds (on top of typical credit risks), including (i) loss-absorption features resulting in a possibility of write-downs, as we saw with Credit Suisse; (ii) non-call risks especially with pressure from regulators to not call back AT1s if it results in higher costs; and (iii) the possibility of non-cumulative coupon deferrals if UBS undergoes heightened market stresses. As a general rule of thumb, we think investors should be mindful of such AT1 risks before considering such investments.

Given our preference for non-perpetuals in light of our view on global rates, we favour the shorter-tenor USD and GBP senior unsecured bonds, namely the Sep 2025 USD bonds, Aug 2025 GBP bonds, and Sep 2027 GBP bonds (Table 1). We also reiterate that these bonds are only available for accredited and institutional investors.

Table 1: Comparison against peers (recommendations bolded)

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