UBS won't stem withdrawals soon as Q3 disappoints

ZURICH (Reuters) - Swiss bank UBS (UBSN.VX)(UBS.N) does not expect to win back assets from rich clients any time soon as it struggles to rebuild its reputation after a bitter U.S. tax row even as its underlying performance improves.

Higher-than-expected accounting charges pushed UBS into its fourth consecutive quarterly loss as it reported disappointing total net withdrawals of 36.6 billion Swiss francs ($35.81 billion) at its key wealth and asset management divisions.

UBS's results contrast with stellar profits seen at European peers Credit Suisse (CSGN.VX) and Deutsche Bank (DBKGn.DE) which both took advantage of a rebound in investment banking at the time UBS was slashing its own operations.

"The performance at the investment bank shows signs of recovery, but significant questions remain on the wealth management front as outflows were larger than anticipated," said Sebastien Lemaire, an analyst with Natixis Securities.

UBS shares fell 7.2 percent to 16.11 Swiss francs by 1059 GMT, their lowest level since the bank settled a U.S. tax lawsuit on August 19, helping dampen sentiment on European bourses, with the DJ Stoxx European banking index .SX7P down 3.3 percent.

For a graphic showing UBS profit and share price, click here: here

UBS's net loss of 564 million Swiss francs was narrower than 1.4 billion Swiss francs in the second quarter but larger than average analyst forecasts for 207 million.

"We do not expect an immediate recovery in client net new money flows," Chief Executive Oswald Gruebel and Chairman Kaspar Villiger, both appointed earlier this year to turn around the Swiss bank, said in a letter to shareholders.

But they noted that pretax operating profit excluding charges nearly doubled to 1.6 billion francs, signaling the crisis-hit bank was gradually on the mend.

"UBS expects to see further progress in restoring the underlying profitability of the business in future quarters, particularly in 2010. However, this progress will depend on market and other factors," they said.

Former Credit Suisse CEO Gruebel is expected to give more details on his strategy for UBS at an Investor Day on November 17.

UBS's Tier 1 ratio, a measure of a bank's financial strength, rose to a better-than-expected 15 percent at the end of the third quarter against 13.2 percent the previous quarter.

UBS Chief Financial Officer John Cryan told an analyst call the core wealth management unit would be under pressure as long as the bank reported losses and also noted UBS was under greater scrutiny than rivals amid a global clampdown on tax havens.

TROUBLE IN AMERICA

During the quarter, UBS settled the U.S. lawsuit, in which Washington accused it of helping rich Americans hide money in Switzerland, but still saw client withdrawals at the troubled Americas wealth management division accelerate to nearly 10 billion francs, almost twice as much as in the previous quarter.

"The brand has been more hit by reputation issues than expected -- especially in the Americas," Vontobel analyst Teresa Nielsen said in a client note.

UBS hired Merrill Lynch veteran Robert McCann last week to try to rebuild its U.S. franchise.

Net client withdrawals at the Wealth Management and Swiss Bank division, were as large as in the previous quarter, with UBS losing net money also among Swiss clients.

In asset management, UBS did better than in the previous quarter, but outflows were still worse than analyst forecasts.

UBS has suffered total net client withdrawals of 91 billion Swiss francs in asset and wealth management this year.

Profitability at UBS's investment bank improved to break even, but was overshadowed by accounting charges.

These included an own credit charge of 1.436 billion Swiss francs and a net loss of 409 million on its sale of it Brazilian Pactual business and charges related to the conversion of the notes issued to the Swiss government after the bank got state aid.

Switzerland sold its UBS stake in August.

Cryan said he expected the investment bank to continue to improve into 2010, but said UBS risked another big charge on its own credit in the fourth quarter as spreads tighten further.

"The investment bank is on the definitive road to recovery but it will be a bit of a wobbly road," UBS's Cryan added.

UBS said its cost reduction program was on track and said it had adjusted its headcount target for 2010 to 65,000 from a previous 67,500 to reflect divestments it announced in 2009. UBS had 69,000 staff at the end of September 2009.

A year earlier, UBS turned a small quarterly profit, mainly due to tax credits, but still ended 2008 with the biggest annual loss in Swiss corporate history.

($1=1.021 Swiss francs)

(Additional reporting by Rupert Pretterklieber and Emma Thomasson; Editing by Mike Nesbit)