Swiss banks could handle a 6 pct leverage ratio

Swiss finance minister Eveline Widmer-Schlumpf said on Nov. 3 that her country’s banks should be subject to higher leverage ratio requirements of 6-10 percent of equity to assets, according to a person with knowledge of the situation. However, any change would be unlikely to happen before a review of Switzerland’s too-big-to-fail financial reforms, due to be presented before parliament at the start of 2015. Widmer-Schlumpf’s comments about leverage were first reported by Swiss newspaper Schweiz am Sonntag. UBS and Credit Suisse shouldn’t bin their turnaround plans just yet. Switzerland’s finance minister Eveline Widmer-Schlumpf managed to wipe 6.5 billion Swiss Francs ($7.1 billion) off the two lenders’ combined market values on Nov. 4, by declaring that they should meet an equity-to-assets “leverage ratio” of at least 6 percent. Although current global rules require only half that, both big Swiss lenders could rise to the challenge.UBS and Credit Suisse can probably manage a 6 percent ratio by 2015 - which is when the leverage ratio requirement can first be reviewed - according to a Breakingviews calculator Credit Suisse will have a leverage ratio of 5.3 percent by 2015 anyway, assuming it can shed an intended 114 billion Swiss francs, retain 7 billion francs of earnings and issue another 7 billion francs of contingent convertible hybrids. To get to 6 percent, it could either lop off (remove by or as if by cutting; "cut off the ear"; "lop off the dead branch") a further 132 billion francs, or raise another 8 billion francs in new capital. If it withheld likely dividend payments, the capital it would need to raise would fall by 5.7 billion francs. But Credit Suisse would have to either raise 50 billion francs in new capital, or achieve 620 billion francs in balance sheet reduction. Widmer-Schlumpf sometimes jumps the gun: last month she said an international probe into foreign exchange manipulation had already uncovered firm evidence of wrongdoing, and then retracted her comments. Banks will be hoping for a similar climb down. UBS looks even better placed. Its restructuring plan implies a 5.6 percent leverage ratio by 2015, assuming 7.2 billion francs of retained earnings, 3.7 billion francs of CoCos and 6 billion francs of capital relief from regulators partly enabled by its restructuring. To get to 6 percent it would need either 4 billion francs of new capital or a further 63 billion francs off the balance sheet. The calculator also doesn’t give either bank credit for additional hybrid instruments that are due to be phased out, or reflect that they would probably be given a more generous deadline than 2015. Yet both UBS and Credit Suisse would struggle if they had to hit a 10 percent leverage ratio. UBS has more capital levers to pull: 23 billion francs in deferred tax-assets would boost the bank’s ratio to 8.2 percent, while paying staff bonuses in contingent capital would get it almost to 9 percent. =========== How it works If every option is left unticked on the calculator, and zero balance sheet reduction is assumed for Credit Suisse and UBS then both banks are left with their Swiss leverage ratios as they were at the end of the third-quarter: 3.5 percent and 2.9 percent, respectively.   Under the calculator's base-case scenario for the end of 2015, Credit Suisse can achieve a leverage ratio of 5.3 percent on current plans. The plans include 7 billion Swiss francs of contingent convertible (CoCo) bond issuance, as estimated by Nomura, and 7 billion francs of retained earnings. The calculator also assumes a 114 billion Swiss francs reduction in the bank's balance sheet. Credit Suisse has said it wants to reduce assets by this amount, but has not said by when.   For UBS, the leverage ratio should rise to 5.6 percent by 2015. This would entail UBS getting an equity benefit from buying back assets hived off to the Swiss central bank under its bailout – the so-called stab fund. It would also include a planned 3.7 billion Swiss francs of CoCo issuance as well as 7.2 billion francs in retained earnings. The bank was also effectively forced to hold more capital for operational risk by its regulator last quarter. Removing that requirement would add 3.6 billion francs to its capital. To get to a 6 percent leverage ratio, UBS can also issue CoCos as bonuses and utilise deferred-tax assets. UBS has said it wants to shrink its balance sheet by 195 billion francs, but, like Credit Suisse, has no deadline for the target.   The calculator allows users to adjust up and down the amount of balance sheet reduction for Credit Suisse and UBS, as well as showing capital shortfalls to a 6 percent and 10 percent ratio for each bank. ================== Hived off: To set apart from a group