UBS Group AG (SIX:UBSG) faced a downgrade to “underweight” by Morgan Stanley. The brokerage cited uncertainties over capital and weak earnings as main reasons for the shift. Additionally, Morgan Stanley cut its price target from CHF 28 to CHF 26, reflecting revised EPS forecasts for 2025-2028.

Reasons Behind the Downgrade

The downgrade happens with proposed Swiss regulatory capital reforms. These changes may require UBS to secure an additional $24 billion in capital, pushing the Common Equity Tier 1 (CET1) ratio requirement to 19%. This situation arises unless UBS manages mitigating actions exceeding 250 basis points.

Morgan Stanley also adjusted its valuation framework from a 16% to 16.5% CET1 assumption and lowered buyback forecasts to $3 billion annually post-2026, significantly below industry consensus.

UBS Trails Peers

• UBS now anticipates a total yield of 6%, well below the 9% average among European competitors.

• The stock trades at 1.15x 2026 projected tangible book value and 8.5x 2027 EPS, which are perceived as low multiples but show limited re-rating potential due to capital overhang.

Performance Trends

UBS has fallen 38% YTD, underperforming the STOXX Europe 600 Banks Index (SX7P). It has fared better against U.S. peers, outperforming the KBW Bank Index by 5%. However, the ongoing capital concerns weigh heavily on investor sentiment.

Future Outlook

Morgan Stanley’s downgrade reveals broader caution towards banks facing tighter regulatory environments and limited capital flexibility. Until UBS clarifies regulations and stabilizes earnings, investor interest is likely to remain subdued.