UBS announces SGD NC5.5 AT1 perps at IPG of 5.85%

UBS Group AG (UBS) plans to issue new AT1 SGD NC5.5 perpetuals at an initial price guidance (IPG) of 5.85%. It is available only for accredited and institutional investors.

UBS has issuer ratings of A3 (Developing) from Moody’s, A- (Stable) 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

(All dollar values in USD and all growth rates are YoY unless otherwise stated.)

We did an article in December 2023 reviewing UBS’s first full quarter of results (3Q23) post-acquisition of Credit Suisse, and a follow-up article covering another UBS AT1 issuance earlier in February 2024. In addition, we also published an article earlier this year explaining upcoming AT1 regulatory changes.

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Following this, we now provide a quick review of UBS’s recent 1Q24 results, and on this new AT1 issuance.

Revenue growth remained robust in 1Q24. Total revenues came in at $12.7b in 1Q24, marking a +46% YoY increase from 1Q23 ($8.7b) and a +17% increase from 4Q23 ($10.9b). The positive YoY growth was helped by higher net fee and commission income (+$1.9b), which in turn was driven by multiple factors including higher portfolio management fees (+$0.8b). Net interest income also continued to increase, but by a smaller margin relative to the above (+$0.2b), as UBS saw lower deposit margins in some segments (e.g. Wealth Management) as well as shifts towards lower-margin deposit products.

However, operating expenses also grew at a similar rate to total revenues: +$3.0b or +42% YoY. Personnel expenses were once again a big contributor (+$2.3b or +50% YoY), amidst ongoing integration-related expenses post-Credit Suisse, as well as higher variable compensation due to higher compensable revenues. We think that the increase in operating expenses is fairly typical and do not see any red flags.

Taking together positive growth in revenues (+46%) and operating expenses (+42%) seen above, UBS’s operating profits saw a sharp increase from $1.5b in 1Q23 to $2.4b in 1Q24 (+59%). Net profit also saw a sharp +70% increase to $1.8b in 1Q24. We think this strong improvement in profitability underscores UBS’s good progress in integrating Credit Suisse thus far.

Our thoughts, and outlook ahead

These results were broadly in line with our expectations. The smaller contribution of net interest income was somewhat expected considering the slowdown in the pace of rate hikes globally, with key central banks like the Fed and ECB pausing for several meetings in recent months (as of 1Q24), with the SNB even cutting rates on 21 March. Meanwhile, other segments like Global Wealth Management have proven to be solid growth drivers for UBS, while cost management also remains a core priority for UBS with 50% of end-2026 cost reductions expected to be completed by end-2024, and 70% for that integration-related expense saves.

Looking ahead, we remain positive about UBS as an issuer. We think UBS continues to make good progress on cost management, with management recently signalling that the effects of cost reductions could come in faster than expected (though the total amount expected to be saved by end-2026 remains unchanged at $13b). We also think that revenues should remain supported amidst solid progress in the Wealth Management segment, as the segment continues to see positive AUM growth as well as decent net new asset inflows. With that being said, investors should note that execution risks relating to the Credit Suisse acquisition until we get closer to 2026, though progress remains good for now.

Credit highlights

UBS reported a CET1 ratio of 14.8% in 1Q24, up from 4Q23’s 14.4% due to a decrease in risk-weighted assets. This represents a solid buffer over the current regulatory minimum of 10.47% and is also slightly above the medium-term guidance for CET1 to hover around the 14% level. Similarly, its 1Q24 going-concern capital ratio (including AT1s) remained healthy at about 17.7% (minimum: 14.77%), while its TLAC ratio came in at 37.5% (minimum: 25.49%).

In our view, UBS’s capital ratios look healthy at the moment. However, we also caution against the possibilities of (i) higher capital buffer requirements coming in 2025 as it is a larger bank post-Credit Suisse acquisition; and (ii) potentially higher capital requirements for Swiss banks if a Swiss government proposal is passed (announced in April 2024).

Thoughts on new issue

We compare this new issue with other SGD AT1 perpetuals, as well as other UBS non-perpetual bonds (all non-SGD) in Table 1. This new issue’s IPG of 5.85% is significantly higher than the yield-to-next-reset (5.24%) of its recently-issued UBS 5.750% Perpetual Corp (SGD), and that of another recently issued AT1 by HSBC (HSBC 5.250% Perpetual Corp (SGD) is yielding about 5.20%). However, we caveat that the new issue’s final price guidance (FPG) is likely to come in below the stated 5.85% IPG.

We also emphasise certain risks associated with AT1 bonds, which extend beyond typical credit risks of bonds in general. One of the key risks includes loss-absorption risks, as this bond has loss-absorption features which could result in a write-down in a significantly adverse scenario, as we saw in the case of Credit Suisse. These AT1 bonds also come with non-cumulative coupon deferrals in periods of market stress. Investors should be mindful of the risks attached to these AT1 perpetuals while considering whether to invest.

For investors that are unwilling to take on the above risks, we see opportunities in UBS’s USD and GBP bonds (non-perpetuals). There are a number of bonds with different maturity, coupon, and yield profiles, which investors can consider depending on their respective investment preferences. Considering our house-view preferring shorter-duration products (amidst a higher-for-even-longer rates environment), one of our key recommendations includes UBS 4.125% 24Sep2025 Corp (USD).

Table 1: Comparison against peers

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in UOBSP 2.550% Perpetual Corp (SGD). The analyst who produced this report holds a NIL position in the abovementioned securities.

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