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Reuters
2 days ago
- Business
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Breakingviews - How UBS and Switzerland can come to terms
LONDON, June 18 (Reuters Breakingviews) - Switzerland is at a crossroads. Two years ago, politicians bent over backwards to help UBS (UBSG.S), opens new tab buy Credit Suisse, partly on the grounds that a failure would imperil the Alpine nation's status as banking hub. In 2025, the same leaders are calling for an extra $24 billion of equity from the enlarged giant, which could erode Zurich's status in another way by prompting UBS to take its $1.5 trillion balance sheet elsewhere. Yet a compromise, to stop the twin extremes of UBS moving or a ruinous bank bailout, looks within reach. Finance Minister Karin Keller-Sutter in 2023 controversially gave UBS significant sweeteners for the Credit Suisse deal, including a government loss guarantee, which Chair Colm Kelleher ultimately didn't need. Now, she wants, opens new tab the bank to fully deduct the value of foreign subsidiaries from the parent bank's common equity Tier 1 (CET1) capital. Keller-Sutter has grounds to insist on unusually high capital ratios. UBS's assets dwarf Switzerland's $950 billion GDP. It also has a large U.S. business, which arguably makes it prudent to have enough equity to withstand any writedowns to overseas operations. The current rules, along with other more bank-specific carveouts, meant that Credit Suisse's capital ratios were more fragile than they seemed in the runup to its rescue, undermining its ability to sort out a perennially loss-making investment bank. It's possible, at least in theory, that something similar could happen to UBS one day. Still, Kelleher and his CEO Sergio Ermotti can legitimately say that the new rules make their bank much less appealing to investors. The government's wider package of measures will by 2030 create a de facto 17.2% minimum CET1 ratio for the listed holding company, compared with 14% absent the planned changes, using UBS's estimates. That erodes returns. In May, before the government released its proposals, analysts expected $11.9 billion of annual earnings and $76 billion of regulatory capital by the end of 2027, implying a 15.7% return on CET1. Raising the capital level to 17.2% would shrink the result to 13.7%. Morgan Stanley's (MS.N), opens new tab equivalent return that year will exceed 19%, according to Breakingviews calculations using Visible Alpha data. What happens next is down to lawmakers in Switzerland's parliament, who will decide whether to approve the rules, or water them down. That process runs slowly. UBS may not decisively know their thinking until the end of 2026. One consideration is whether the bank is exaggerating the pain of the hit. Stock analysts reckon there are several billion dollars of spare capital in UBS's foreign subsidiaries. Keller-Sutter's number crunchers say the bank can shrink the de facto CET1 minimum below 15% through measures such as so-called repatriation, which involves pulling money out of the overseas units to shrink the capital required to back them. That lower number is close to Morgan Stanley and JPMorgan's (JPM.N), opens new tab CET1 levels, the government points out. Another possibility doing the rounds in Zurich is that UBS could use more leverage at its listed holding company to offset the capital trapped lower down in the corporate hierarchy. Finally, a six-to-eight-year transition period dilutes the intensity of the capital pain now. Ermotti and Kelleher have some strong possible counter-arguments, though. It would be perverse to partially solve a leverage issue at one set of subsidiaries by borrowing more at another level. Moreover, the government's international comparison mixes apples and oranges. Keller-Sutter's team benchmarks UBS's requirements against the 15% to 16% levels of Morgan Stanley and other American rivals, which are tangibly higher than what U.S. regulators order them to hold. Morgan Stanley's actual regulatory minimum is 13.5%. The basic fact is that UBS could have a meaningfully lower minimum equity ratio, and therefore higher returns and even share price, if it was based elsewhere. Those numbers add weight to an implicit threat: UBS could move its headquarters to New York or London if parliament sides with the government. The bank's growth opportunities are predominantly outside Switzerland. The planned rules make U.S. expansion costly, in capital terms. It's not a stretch to imagine that Kelleher, a former Morgan Stanley executive, would prioritise global expansion over local loyalties. If his old shop or JPMorgan lobbed in a bid, offering another way to switch domicile, he might listen. Switching HQ could create a meaningful tax bill under local laws and raise questions about whether UBS's additional Tier 1 (AT1) debt would be eligible under U.S. regulations. The bank also could lose any clients who like the fact that UBS is neither American nor British. Yet the conservative lawmakers, which currently constitute the biggest grouping in parliament, will also be acutely aware of the risk of going from having two globally relevant banks a few years ago to none. That could represent a big blow in a country where banking accounts, opens new tab for 5% of GDP. Yet the biggest reason a compromise is possible is that there are ways to fudge the Keller-Sutter plan while retaining its essence. Allowing UBS to cover the foreign subsidiaries' value with AT1 capital as well as CET1, for example, would still arguably protect the parent bank's equity. Letting all outstanding AT1s count for these purposes could cut the CET1 ask to just $5 billion rather than $24 billion, JPMorgan analysts have calculated. That might be too small for comfort, but lawmakers could in theory split the difference by saying that AT1s can cover 20% of the capital, with CET1 accounting for the rest. Doing so would imply $15 billion of extra CET1, or about two-thirds of the current ask, and imply a 15% de facto minimum requirement according to Breakingviews calculations. It might not be a satisfying outcome for capital purists, particularly after the controversial Credit Suisse AT1 writedown tainted the funky hybrid securities, but Swiss supervisors are already working to make those securities absorb losses more readily in a crisis. Kelleher and Ermotti have some leverage by virtue of the possible HQ move, but time is not on their side. UBS faces 18 months or more of capital uncertainty and its shares, off 20% since late January, could fall further if investors get jittery. Lawmakers preoccupied with avoiding a future bank failure, in contrast, will want to take their time. Yet they should remember that while Credit Suisse's rickety capital structure didn't help, it ultimately went bust because wealthy clients mistrusted its ropey business model. As such, hitting UBS's returns carries risks as well as rewards. Follow Liam Proud on Bluesky, opens new tab and LinkedIn, opens new tab.
Reuters
12-06-2025
- Business
- Reuters
Breakingviews - Private credit dives back into FABulous funding
NEW YORK, June 11 (Reuters Breakingviews) - Insurance is becoming the engine of the $17 trillion private asset management industry. For years, buyout barons funded deals with checks from pension funds or college endowments. An M&A slowdown, middling returns, and the chance to muscle banks aside has turbo-charged a push into lending by asset managers like Apollo Global Management (APO.N), opens new tab. Their fast-expanding private credit arms increasingly draw funding from the insurance industry. Insurers, in turn, are raising cash by returning to a pre-financial crisis favorite: Funding Agreement-Backed Notes (FABNs). By their nature, insurance companies have cash to spare. They collect premiums and invest the proceeds until a policy pays out. Their iron law is that assets and liabilities should have the same duration. If an insurer sells an annuity promising 5% interest that begins paying out in five years, it must accumulate assets which mature over the same timeframe while generating sufficient income to more than cover that payment. Private credit offers a neat fit: IOUs pay down predictably and offer a range of different returns tuned to risk. This pairing is particularly appealing for asset-based finance, industry-speak for loans backed by anything from cars to Picassos. Lenders can package such debt into investment-grade bonds, which neatly slot into insurers' balance sheets. By the end of 2024, U.S. insurers had plunged roughly $700 billion, or 13% of their total bond holdings, into asset-backed and other structured securities, according, opens new tab to the National Association of Insurance Commissioners. Apollo reckons, opens new tab asset-backed finance is a $20 trillion opportunity, equivalent to almost 10 times the private credit industry's current $2.2 trillion hoard, per PitchBook. The iron law runs both ways, though. For every dollar invested in asset-backed finance, there must be a corresponding liability. That is why insurers like Apollo's Athene subsidiary, KKR-owned Global Atlantic and their rivals have rushed to sell annuities to policyholders. Annual retail issuance exploded from the roughly $200 billion common prior to the pandemic to $434 billion in 2024, according, opens new tab to industry association LIMRA. Even this, though, is not enough. Enter FABNs. The notes dispense with the need for laborious marketing or managing the risk – common to annuities – that policyholders cash them in ahead of schedule. Instead, FABNs allow insurers to offer a guaranteed return to big investors like PIMCO or Janus Henderson. Here's how it works, opens new tab: An insurer sets up a special purpose vehicle – effectively a box - which sells bonds to investors. The insurer drops a funding agreement into the box and receives the cash from the bonds. This is an annuity, but on a much larger scale - frequently $500 million or more. The insurer makes payments to satisfy the funding agreement, which in turn flow to the bondholders. Excluding various other flavors of funding agreements, there were some $191 billion of FABNs outstanding in the U.S. as of the end of 2024, according to Federal Reserve data, opens new tab, surpassing the previous 2008 peak by 68%. The notes have several advantages. Despite blurring the line between debt and annuities, ratings agencies treat them as operating rather than financial leverage. Because the securities are issued by an insurer's operating company, they rank senior to holding company debt. That allows them to win superior ratings. FABNs issued by Athene enjoy an A+ label from Fitch, two notches above the grade awarded to its holding company. Some 28% of issuance rated by Fitch in 2024 won the highest triple-A rating. This wheeze is not limitless. AM Best and Moody's raise an eyebrow if an insurer's FABNs top 30% of the liabilities across its operating companies. Fitch begins looking askance if the securities top 20% of an insurer's general account. Athene's funding agreements reached 21% of its net reserve liabilities in the first quarter of 2025, according to company filings, opens new tab, though that figure includes various other types of liabilities. But the market is not just racy upstarts. While Athene was 2024's largest issuer, at $11.2 billion, some of the oldest firms around pioneered the market. New York Life issued roughly $10 billion of notes rated by Fitch last year. MetLife and Pacific Life Insurance also joined in. One concern is that FABNs have caused trouble before. Back in 2001 insurers began issuing extendible FABNs, which allowed investors to redeem the notes after roughly a year. After reaching a peak of over $26 billion outstanding in 2007, investors rushed for the exits during the financial crisis, draining liquidity from insurers. This a textbook example of what investors call 'rollover risk', where an issuer must find fresh funding for longer-dated assets. Extendible FABNs no longer exist. Some 66% of issuance thus far in 2025 matures in three to five years, according to figures from Deutsche Bank aggregated using Bloomberg data. However, short-term financing remains a temptation. Some insurers issue Funding Agreement-Backed Commercial Paper with maturities measured in days. Fitch rates programs from Brighthouse Financial, MetLife, Jackson National, Pacific Life and Protective Life. FABCP outstanding crept up to about $11 billion at the end of 2024. When designating MetLife a systemically important financial institution in 2014, U.S. regulators specifically pointed, opens new tab to rollover risk from FABNs and FABCP. Even if insurers remain disciplined in matching the duration of assets and liabilities, there are other risks. For one, private credit's rapid expansion has not yet been tested by a severe downturn. If assets go sour, insurers are on the hook for the losses. The opacity of private loans flowing into their balance sheets can be bewildering to outsiders; a high-profile blow-up could make buyers of FABNs leery, triggering a funding crunch. The notes are, of course, one of multiple ways in which insurers gather liabilities, including annuity sales or reinsurance deals. But they are becoming very large and are uniquely abstracted from insurers' core purpose of serving policyholders. Last year, Apollo's Athene issued notes equivalent to 31% of its retail annuity sales. The market has a habit of following the firm led by Marc Rowan. Apollo, though, has advantages over rivals: it can directly make the kinds of loans that will be matched with Athene's liabilities, while its Atlas SP Partners unit advises others on creating yet more asset-backed securities. FABNs could enable an over-eager insurer to chase rapid growth without a clear grasp of its pipeline of assets. A spree-fueled run funding dicey credits could rebound on others, too. Even the highest-octane engines can backfire. Follow Jonathan Guilford on X, opens new tab and LinkedIn, opens new tab.
Reuters
12-06-2025
- Business
- Reuters
Breakingviews - India's wealth boom is within reach for foreigners
MUMBAI, June 12 (Reuters Breakingviews) - Foreign money managers are pouring into India to cater to the rising rich. Many of them may find success easier to come by than they did in neighbouring China. The race kicked off in earnest this week when BlackRock (BLK.N), opens new tab won regulatory approval to launch a wealth business, within a month of securing a go-ahead for its mutual fund operations. The world's largest asset manager led by Larry Fink is back in the country after exiting a local joint venture in 2018. This time the U.S. firm is in partnership with Jio Financial Services ( opens new tab, an upstart spun off from tycoon Mukesh Ambani's $227 billion Reliance Industries ( opens new tab. Others present also are digging deeper to tap everyday savers. Armed with a new licence, HSBC (HSBA.L), opens new tab will push into 20 new cities in search of wealth clients. Its rival Standard Chartered (STAN.L), opens new tab is pivoting toward affluent clients and away from single product relationships. Meanwhile, Blackstone bought wealth services provider ASK Investment Managers in 2022, whose parent now plans to launch a mutual fund. Underway is a dramatic shift in how Indians put money to work. Households' net financial wealth, after deducting liabilities, rose 249% to $3 trillion over the nearly 12 years to the end of March 2023, per researchers at the Reserve Bank of India. Bank deposits account for 43% of financial assets, down from 51% in March 2012. In effect, households are moving deposits into riskier instruments. Pumped up by a high-voltage marketing campaign targeting mom-and-pop savers, the mutual fund industry's net assets under management stood at 72 trillion rupees ($845 billion) as of May, rising 22.5% year-on-year. Mutual funds' share of net financial savings was 8.4% at the end of March 2023, up from less than 1% a decade ago, per data from industry group Association of Mutual Funds in India and research firm Crisil Intelligence. And there's plenty of runway for growth; the industry counts just 3% of the population as customers. Beyond everyday savers, the number of Indian ultra-high net worth individuals will increase to 19,908, a 50% increase during the five years to 2028, property consultancy Knight Frank reckons, faster than in any other geography. There's also rising interest from richer parts of the 35 million-strong Indian diaspora living to invest at home. To be sure, by some measure India currently has just one twelfth of the investable wealth assets under management that China had in 2020. Ping An Asset Management alone shepherds funds nearly equivalent in value to those of the entire Indian asset management industry. Yet the smaller opportunity may be easier for Western financial firms hungry for growth to tap. A sluggish economy, poor stock market returns, and geopolitical tensions dim the allure of China. Asset managers including Fidelity and Schroders have cut costs and scaled back expansion plans in the People's Republic. India not only saw GDP growth of 7.4% in the March quarter, but its stock market is booming too. Unlike in China where equities have miserably failed to reflect decades of strong economic growth, Indian stocks are better correlated to GDP. Mutual fund investors in India are largely equity-oriented; in China, 68% of flows were into fixed income instruments in 2022, per Fitch Ratings. Of course, local competition is formidable. There are 51 mutual fund houses, and the largest by assets under management are backed by Indian banks with a foreign partner: State Bank of India's ( opens new tab joint venture with France's Amundi ( opens new tab leads, followed by ICICI Bank ( opens new tab with Prudential (PRU.L), opens new tab. What's new is the potential for digitisation to drive down high expenses. Thanks to a distributor-led model, the asset-weighted median expense ratio for equity funds, a measure of cost, was 1.78% in India, higher than 1.75% for China and 1.37% for Korea in 2022, data from Morningstar shows. In partnering with Jio Financial, whose telecom affiliate counts 477 million subscribers, BlackRock probably sees an opportunity to scale up quickly and use technology to cut out the middleman. Only 41% of mutual funds' assets under management are sourced directly from investors, per AMFI and Crisil Intelligence, and the share is probably lower by number of accounts. If executed well, the BlackRock-Jio duo will disrupt the status quo and eat into the business of homegrown technology-led brokers like Zerodha and the soon-to-go-public Groww, which sells one in every four 'systematic-investment plans' where individuals commit a fixed amount, usually monthly, to mutual funds. Both privately-owned companies might be worth up to $7 billion each. Singapore's StashAway, backed by Hamilton Lane and others, has secured over $1 billion in assets under management through digital sourcing within just four years of its launch in 2017. Not everyone feels the prize is within reach. Some of the new strategic partnerships emerging look more like an exit. UBS (UBSG.S), opens new tab is acquiring 5% of Mumbai-listed $5 billion 360 One ( opens new tab and is transferring the onshore wealth business it inherited through the acquisition of Credit Suisse to the Indian group. The Swiss bank closed its own Indian wealth business roughly a decade ago. The India opportunity also has some hard-looking longer-term limits. The real value BlackRock might bring to the table for Indian investors probably rests in deploying their money offshore. That edge is dulled by capital controls; New Delhi imposes a $250,000 limit on sending money overseas. That looks more liberal than Beijing's long-standing limit of $50,000, but India has ramped up taxes on outbound remittances exceeding $11,700. For now, at least, there is plenty to do within India. Follow Shritama Bose on LinkedIn, opens new tab and X, opens new tab.
Reuters
05-06-2025
- Business
- Reuters
Breakingviews - Wise's US listing switch lacks financial wisdom
LONDON, June 5 (Reuters Breakingviews) - Wise (WISEa.L), opens new tab helps customers exchange money more cheaply, transparently and, well, wisely. But the $15 billion firm's plan, opens new tab to shift its primary listing to New York from London seems less clever. CEO, co-founder and largest shareholder Kristo Käärmann wants to tap deeper pools of liquidity and attract more American investors. Yet for a company already trading at a premium valuation, the move raises more questions than it answers. Käärmann's case rests on two key points. Wise's shares are thinly traded in London, meaning investors risk moving the market by offloading stock in large volumes. Second, a U.S. listing would boost the company's appeal to American investors and even customers. There's truth to both. The total daily value of Wise's trading volume has averaged about half of $4 billion American peer Remitly Global over the past two years according to a Breakingviews analysis of LSEG data, even though the London-listed group is much bigger. And some domestic-focused U.S. investors prefer to hold stocks listed in their home market. Yet Wise needn't cross the Atlantic Ocean to boost liquidity. One possible obstacle to winning more investors at home is the company's quirky governance, where Class B owners have nine votes per share. The effect is that Käärmann has a tight grip on the company despite owning less than 20% of the tradable Class A stock, according to LSEG data. The alternative to hopping across the pond would be to get rid of some of the CEO's special rights, which could in turn smooth Wise's entry into Britain's main stock benchmark, the FTSE 100 Index (.FTSE), opens new tab. That would boost liquidity to U.S. levels: LSEG research, opens new tab found that, relative to the volume of companies' tradable shares, FTSE 100 trading levels were slightly higher than in the S&P 500 Index (.SPX), opens new tab in 2022. Nor is the United States Wise's biggest geography, as it was for other listing switchers like CRH and Ferguson Enterprises. For Käärmann's company, the American market comes third after Europe and Asia, making up 20% of group revenue. As for brand awareness, switching trading venue seems like a strange way to gain publicity compared with a marketing campaign. Moving the listing also brings possible downside. Wise trades at 29 times consensus 2027 earnings – beating Remitly, Block, PayPal and others. Other metrics tell the same story: there's no evidence of a valuation penalty because of the company's UK trading venue. That means Käärmann has much to lose if the company ends up as one of the many 'orphaned' pond-hoppers, which switch listing but never quite catch fire in the U.S. market. Research by think tank New Financial earlier this year found that just 44% of the 16 European companies that had moved across the Atlantic subsequently beat the performance of their home continent. The one consolidation is that this doesn't seem to be about extra CEO pay: Käärmann, as a major shareholder, has taken a roughly 200,000-pound ($270,000) cash salary in recent years, which is tiny compared to most bosses. There are no plans to raise that, according to a person familiar with the matter. But for investors, Wise's shift looks like a poor financial trade-off. Follow Karen Kwok on LinkedIn, opens new tab and X, opens new tab.
Reuters
14-05-2025
- Business
- Reuters
UnitedHealth faces a long and painful recovery
NEW YORK, May 13 (Reuters Breakingviews) - Even UnitedHealth (UNH.N), opens new tab will struggle to overcome parasitic medical costs that Warren Buffett once called a tapeworm eating away at U.S. economic competitiveness. The $300 billion healthcare conglomerate reinstalled, opens new tab Chairman Stephen Hemsley as CEO and yanked its financial guidance. After abruptly losing about half its market value, however, any potential recovery will be long and painful. UnitedHealth stayed hardy for decades. From 2010 to 2020, its shares returned about 10 percentage points more per year than web search giant Alphabet. It capitalized on market power in insurance, growth in Medicare, the U.S. government program that covers medical costs for the elderly, and expansion into adjacent areas. Such outperformance screeched to a halt, months after a senior UnitedHealth executive was assassinated, allegedly by a man outraged by insurer practices. The company's first-quarter profit fell considerably short of what analysts were expecting, sending the stock price reeling in April. It tumbled another 15% on Tuesday after the news that boss Andrew Witty was departing for personal reasons. Hemsley, who served as CEO from 2006 to 2017, will be contending with new ailments. Although UnitedHealth is astoundingly profitable, evidenced by a 27% return on equity during the first three months of the year, both the company and the industry are in a much harsher spotlight. Intense public scrutiny makes it harder, opens new tab for insurers to restrain costs by, say, denying claims for care. Medical expenditures also have returned to trend, growing faster than the U.S. economy. They increased 7.5% in 2023, according to official data. Proposed assistance from the Trump administration to double the increase in reimbursement rates, to 5%, for Medicare Advantage, the privately administered version of the government program, will go only so far. It's also getting tougher to estimate costs for new Medicare Advantage patients. Part of the problem is that more than half of all Medicare participants have already enrolled. Insurers receive higher payments for sicker patients, but that incentivizes administrators to either select healthier customers or claim that they are ailing worse than they really are. The most profitable patients probably have been picked over. Moreover, government largesse for private health insurers looks increasingly ripe for targeting. If Medicare Advantage reimbursements were cut to better reflect their risk, it would save the government more than $1 trillion, opens new tab by 2035, the Congressional Budget Office estimated. Helmsley may be forced to opt for radical surgery, which is always dangerous. Follow @rob_cyran, opens new tab on X CONTEXT NEWS UnitedHealth said on May 13 that Chairman Stephen Hemsley would return as CEO, effective immediately, to replace Andrew Witty, who stepped down for personal reasons. Hemsley was previously in the role from 2006 to 2017. The insurance company also suspended its 2025 guidance, blaming accelerating medical spending by patients and costs. UnitedHealth shares were down 16%, to $318.93, at 1057 EDT.
