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UBS: no dividends 'for some time'

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Swiss bank UBS does not expect to pay dividends for some time so that it can preserve capital to meet the tougher Basel III rules and avoid the need to raise fresh funds.

UBS follows several other lenders who are starting to provide more clarity on the impact of the new rules on bank capital and liquidity, unveiled less than three weeks ago as global regulators try to prevent a repeat of the financial crisis.

UBS, Europe's largest wealth manager by assets, would reduce its risk-weighted assets (RWA) under the new rules, which it expected to meet by 2013, chief financial officer John Cryan said on Thursday.

He said the bank could achieve a core Tier 1 capital ratio - a measure of the top-quality capital it has to hold in reserve - of around 13 percent by 2013 by retaining earnings.

The main yardstick for Basel III is a core capital ratio of 7 percent. Many banks are already above this but the new rules are stricter on what counts as core capital than the previous regulations, prompting fears of more rights issues in the sector.

A government-appointed commission of experts is expected to recommend that UBS and Credit Suisse, Switzerland's two largest banks, maintain a core capital ratio of at least 12 percent, according to Swiss media reports.

"The fact they can meet capital requirements through retained earnings is evident. Our concern is more with the implications on funding costs and on achievable returns for the investment bank," said Cheuvreux analyst Christian Stark.

Speaking at the Bank of America Merrill Lynch financials conference, Cryan warned client activity was low throughout the third quarter after UBS's investment banking results stood out from those of competitors in the second quarter on strong equities and forex gains.

UBS said it had already made strong progress in reducing risk by decreasing leverage, improving risk management and governance and returning to profitability.

RISK-WEIGHTED ASSETS

UBS needed a government bailout during the credit crisis but has since started to rebuild its capital in preparation for the stricter rules.

Applying Basel III standards, UBS's RWA would have been around 400 billion Swiss francs ($406 billion US) at the end of June Cryan said, adding he was fairly confident of cutting it to nearer 300 billion francs in the medium term.

The changes to core capital ratios under Basel III will take the shine off UBS and rival Credit Suisse, Kepler analyst Dirk Becker said.

"Basel III proforma risk weighted assets are to rise to 400 billion Swiss francs for both banks, bringing down the core tier one ratios below 7 percent. This would still comply with the upcoming rules, but cost the Swiss banks their prime status," he said.

Analysts were also unsure about the extent UBS could reduce its risks from current levels.

"You have to be a bit sceptical about risk mitigation, they've been trying for years to reduce risk and now we find they can do it by 100 billion (Swiss francs) at a stroke?" said Helvea analyst Peter Thorne.

SWISS TOP-UP

The commission of top regulators, bank executives and other industry representatives is on Monday likely to publish a report on measures Switzerland could introduce, including additional capital requirements and changes to banks' structures to prevent a big bank failure dragging down the whole economy.

"I think most of what will come out will be in relation to capital adequacy rather than having any prescriptive structural requirements for us," Cryan said.

Swiss regulators are expected to allow the use of contingent convertible (CoCo) bonds -- which are turned automatically into equity depending on a certain regulatory trigger -- to meet some of the additional capital requirements.

Cryan was sceptical that international consensus could be achieved on the use of these CoCo bonds and said if Swiss regulators insisted on them being issued in Swiss francs there might be insufficient demand to absorb supply.

"Our preference is to actually capitalize the bank with real capital and not with senior debt," Cryan said.

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