UBS suffers loss as wealthy clients flee

ZURICH (Reuters) -- Swiss bank UBS posted another big loss in the second quarter as wealthy clients continued to take their cash elsewhere, but there were signs of improvement in its best underlying performance in two years.

UBS (UBS) said on Tuesday it remained cautious about its prospects, given the economic environment, but after taking out one-off restructuring and other charges of $2.17 billion, it made an operating profit of 971 million francs, its best in eight quarters.

"The results are disappointing. But we see some encouraging signs," Chief Financial Officer John Cryan said.

The bank posted a net loss of 1.4 billion francs, compared with an average forecast from analysts for a loss of 1.1 billion francs, and suffered 39.4 billion francs of outflows at its wealth and asset management divisions.

"Overall, results look quite good, compared with the 2 billion franc loss from the previous quarter," said Sarasin analyst Reiner Skierka.

"On the other side, too much optimism is overdone at the moment; there are still question marks with regard to the future and to when they will be able to reverse money outflows."

The loss came in contrast with forecast-beating results at some European rivals such as Switzerland's Credit Suisse (CS) and HSBC (HBC) and Barclays (BCS) in Britain, which took advantage of a market rebound while UBS was busy cutting costs and fighting charges from U.S. authorities that it had helped American clients hide tax liabilities.

The U.S. government and UBS struck a deal on Friday to settle the tax dispute by the end of this week.

Shares in UBS were 2.4% higher at 16.39 francs in the first 10 minutes of trading. The stock has missed out on much of the recent rally in the financial sector, but rose in the wake of the U.S. tax deal to gain 8% in the year to date, compared with a 42% rise for the DJ Stoxx European banking sector.

UBS is not expected to pay a fine as part of the tax deal and could hand over to Washington 5,000 names of U.S. clients holding secret Swiss accounts, or 10% of the names Washington was after.

"This is a positive development in a matter that has adversely affected our efforts to regain the trust of our clients and to restore momentum to our business," said Chief Executive Oswald Gruebel and Chairman Kaspar Villiger in a letter to shareholders.

Cryan said the bank had made no additional provision for settling the U.S. litigation.

The U.S. case has compounded UBS's woes in the credit crisis, prompting many of its wealthy clients to withdraw their assets, a trend that accelerated in the second quarter with outflows increasing from its wealth management operations in the Americas and its asset management business.

However, outflows slowed at the wealth management and Swiss bank business, to 16.5 billion francs from 23.4 billion in the first quarter, with outflows from Swiss clients almost stopping at 0.2 billion, compared with 16.3 billion from global clients.

"Higher net outflows, particularly in European locations, were only partly offset by net inflows in the Asia Pacific region," the bank said.

UBS had already warned in June that it would post a loss, and said it saw client withdrawal in all its wealth management and asset management divisions.

The bank had to accept a 6 billion franc state cash injection last year after making $54 billion writedowns on toxic assets. When the bank raised $3.5 billion of new capital in June, the government said it had agreed not to sell its stake before Aug. 4 as part of the deal.

Cryan said now the quarterly report was out of the way, the Swiss government could to look to convert its mandatory convertible notes into shares and place them in the market.

The Swiss finance ministry declined to comment on it stake, but said the bank was still in a process of stabilization and, like other banks, was starting to recover in a difficult environment.