Nov. 3 (Bloomberg) -- UBS AG, Switzerland’s largest bank, fell the most in two months in Swiss trading after redemptions by wealthy clients accelerated in the third quarter.

UBS declined 1 franc, or 5.8 percent, to 16.35 francs. The Zurich-based bank said today that outflows at its wealth management units totaled a net 26.6 billion francs ($25.8 billion), up from 22.3 billion francs in the second quarter.

Chief Executive Officer Oswald Gruebel, who joined in February, is trying to halt redemptions by rich clients and rebuild the investment bank after more than $50 billion of losses and writedowns tied to the financial crisis. Earnings at the wealth management and Swiss bank unit, the biggest profit contributor, slumped 52 percent to 792 million francs in the third quarter from a year earlier, the bank reported.

“The core private banking franchise still seems to be hurting,” said Florian Esterer, who helps manage about $49 billion at Swisscanto Asset Management in Zurich. “The money outflows are still bad across all divisions.”

UBS reported a third-quarter net loss of 564 million Swiss francs, bigger than analysts’ estimated. The results included a 1.44 billion-franc accounting charge that reflects rising costs to UBS should it buy back outstanding debt.

‘Cash Cow’

Gruebel and Chairman Kaspar Villiger, in a letter to shareholders, said they don’t expect “an immediate recovery” in client inflows after UBS settled a U.S. lawsuit related to tax evasion in August and the Swiss government sold its investment in the company.

The profit decline at the wealth management unit “will particularly concern the market as it has often been viewed as a cash cow that will support UBS no matter what the performance is in other divisions,” Dirk Hoffmann-Becking, a London-based analyst at Sanford C. Bernstein Ltd., said in a note.

Outflows accelerated from the second quarter as withdrawals resumed in Asia and Switzerland. Redemptions totaled 182.9 billion francs in the 18 months through the end of September. They may persist at least until UBS can regain clients’ confidence by returning to profitability, Chief Financial Officer John Cryan said on a conference call.

Gruebel hired former Merrill Lynch & Co. executive Robert J. McCann last month to help stop client withdrawals at the wealth management unit.

Fourth-Quarter Charge

The pretax loss at UBS’s investment bank narrowed to 1.37 billion francs in the third quarter from 2.75 billion francs a year earlier. Sales and trading revenue of 2.15 billion francs was the bank’s highest of the past nine quarters, and the fixed- income business had its first quarter of positive revenue during that period.

Earnings in wealth management Americas fell 41 percent to 110 million francs, while asset management profit dropped 69 percent to 130 million francs.

In addition to the charge on its own debt, UBS booked a net loss of 409 million francs related to the sale of its Brazilian Pactual unit because of foreign currency fluctuations, and a 305 million-franc loss from the sale of the Swiss government’s investment. The bank said it expects another charge on own debt in the fourth quarter, which could be “comparable” in size to that of the past quarter, Cryan said.

Credit Suisse Group AG, the second-biggest Swiss bank by assets, reported the highest quarterly profit in more than two years for the third quarter, helped by gains from trading. Deutsche Bank AG, Germany’s biggest bank, said last week its net income more than tripled on tax gains and trading revenue.

Morale Boost

UBS’s priority is to restore profitability after the U.S. settlement lifted a “tremendous weight” and the sale of the Swiss government’s holdings gave a “boost to morale across the firm,” Cryan told investors on Sept. 30. The company, which is scheduled to hold an investor day on Nov. 17, has “detailed plans” of how to boost earnings, he said.

Gruebel, 65, has already announced 7,500 job cuts, sold a Brazilian unit, replaced four executive board members and tapped investors for 3.8 billion francs to bolster capital.

“Business is steadily returning to normal,” Gruebel said in the statement today. “Having stabilized the bank’s financial condition and resized the business, I expect to see further progress in future quarters, particularly in 2010. However, this progress will depend on market and other factors.”

The company may not attract net new client investments until 2011 after losing advisers, Citigroup Inc. analysts forecast in September. The number of client advisers at the main wealth management and Swiss bank unit fell by 207 in the third quarter, and UBS expects a reduction of another 100 this quarter, Cryan said.

McCann Appointment

UBS agreed in August to divulge information on 4,450 accounts to the Swiss tax authorities. The government will determine whether individual cases fit criteria supplied by the U.S. in an information request, as part of the settlement of the lawsuit that sought data on as many as 52,000 clients.

UBS hired McCann, who used to run the brokerage unit of Merrill Lynch, as its head of wealth management in the Americas. McCann said he will review the business with the aim of boosting revenue and cutting costs to return to profit.

“McCann was a fantastic nomination,” said Teresa Nielsen, a Zurich-based analyst at Vontobel. Gruebel “has done an incredible job so far, but work still lays ahead of him.”

UBS amassed the biggest writedowns and losses from the credit crisis among European competitors, and had to turn to the Swiss government a year ago for a 6 billion-franc capital injection to help it spin off risky assets into a Swiss National Bank fund. The bank last year reported a net loss of 21.3 billion francs, a record in Swiss corporate history.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

Last Updated: November 3, 2009 11:55 EST