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UBS share price flashes a warning pattern as capital rules force tough choices

UBS shares have entered a technical correction, falling more than 12% from their high for the year. The stock dropped to 39 francs after peaking at 45 francs in August. Attention now turns to the bank’s upcoming earnings report and to the options available to it as Switzerland prepares to introduce stricter capital requirements.

UBS faces hard choices amid capital requirement vote

Switzerland’s upper house recently voted for strict capital requirement rules for the country’s banks to prevent another Credit Suisse-like collapse. The vote will now move to the lower house, which is expected to vote in favor of it. 

Switzerland wants UBS to back its foreign units with 100% Common Equity Tier 1 capital. Such a move would tie up over $20 billion, which UBS believes is excessive and harmful to its international business.

UBS is now exploring different options. The most basic one is where it decides to stay in Switzerland and absorb all the costs itself, something that some of its biggest investors, like Artisan Partners and Cevian, have supported. 

Another option is for the company to leave its domicile in Switzerland for another country. According to the FT, London has pitched the idea of the bank moving its global headquarters and listing to the country. Such a move would make it the fourth-biggest company in the FTSE 100 Index. 

The US is also seen as an alternative destination as the company seeks to compete with local giants like Morgan Stanley and Goldman Sachs. It received a US banking license earlier this year.

The risk, however, is that the Swiss government will decide to impose a high tax on the company. Some analysts believe that it can impose as high as $10 billion. Indeed, the country’s finance minister has argued that leaving will be more expensive and legally complex than it stomachs the new capital rules.

Potential USB and Morgan Stanley merger

UBS has other options, including merging with another company, with most analysts arguing that Morgan Stanley is a viable option. Besides, the current UBS CEO spent many years working at Morgan Stanley. Such a move would combine the biggest US wealth manager with the largest one in the world, creating some important synergies.

At the same time, UBS may decide to be acquired by a smaller international bank, a move that would help it to avoid the exit tax. Such a reverse merger would see UBS be left with the bigger share of the company. 

The other option is for UBS to split into two: a local Swiss bank and an international one. In this case, Swiss UBS would have its domestic retail and corporate bank, while its investment bank would be under one foreign company. The main issue with this option is that most of its overseas business is booked directly through foreign branches rather than subsidiaries. 

In addition to these developments, UBS stock will react to the upcoming earnings report. The last earnings showed that its net profit rose to $2.8 billion, while its revenue rising by 16% to $13.3 billion. Its next earnings report will come out on October 28.

UBS share price technical analysis

UBS stock chart | Source: TradingView

The daily chart shows that the UBS stock has retreated in the past few days. It was trading at 39 francs, down from the year-to-date high of 45 francs. It has already moved below the 50-day Exponential Moving Average (EMA).

Most notably, it has dropped below the 23.6% Fibonacci Retracement level. It has also formed a symmetrical triangle pattern whose two lines are about to converge. This triangle is part of the bearish pennant pattern.

Therefore, the stock will likely have a bearish breakout, potentially to the 50% retracement level of 36 francs.

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