It has just become clear how flighty are the wealth management assets on which banks like UBS make their money. For UBS and for all banks, the cost of deposit liabilities is going up. The cost of AT1s is likely to skyrocket. These have a new position in the capital stack, junior even to common equity. The secondary market will be offer-only until investors recalculate the required compensation.
Risk aversion and tightening financial conditions make it likely that non-performing loans will rise from here. UBS may be given a long time to meet them, but its global systemically important bank capital requirements are going up; banks’ cost of equity is going up; net interest margins are coming down; and returns will likely fall.
UBS has taken on substantial deal execution risk that will take up management attention. While UBS will run down the markets businesses that the previous Credit Suisse management was going to keep, it sounds like it will keep the investment bank Credit Suisse had planned to spin off.
From ‘Credit Suisse and UBS: The New Risks’, Euromoney
