May 6 (Bloomberg) -- UBS AG, battered by $17.3 billion of first-quarter losses at its investment-banking unit, plans to cut 5,500 jobs and said clients withdrew a net $12.2 billion from its asset- and wealth-management divisions.

The headcount reductions, which amount to about 7 percent of the workforce, will include as many as 2,600 positions at the securities division, the company said in a statement today. The bank also said it plans to exit the municipal bond business and sell $15 billion in distressed assets to a newly created fund managed by BlackRock Inc. UBS had a net loss of 11.5 billion francs ($10.9 billion) in the first quarter.

UBS fell 4.5 percent in Swiss trading, the most in four weeks, after clients withdrew more assets than they added for the first time in almost eight years. Chief Executive Officer Marcel Rohner told analysts he expects ``tough business conditions,'' which already caused $38 billion of markdowns at Switzerland's biggest bank, to continue.

``The bank's reputation is tarnished,'' said Dieter Winet, a senior portfolio manager who helps oversee 63 billion francs at Swisscanto Asset Management in Zurich. ``They pointed out some problems in private banking, which is their last jewel. The other two divisions have even bigger problems, as one nearly drove UBS to bankruptcy.''

Earnings Breakdown

Pretax profit at the wealth-management and business-banking unit fell 1.7 percent to 2.15 billion francs, while profit from asset management slumped 17 percent to 330 million francs. The 18.2 billion-franc loss at the securities unit compares with a profit of 1.54 billion francs a year ago.

The job cuts are part of the 65,000 reductions announced by the world's biggest banks and securities firms in the past year, as writedowns and losses from the U.S. subprime crisis swelled to $319 billion.

The measures will save about 3 billion francs a year, UBS said. The bank's first-quarter loss after writedowns of $19 billion was in line with its estimate on April 1. It had a 3.03 billion-franc profit a year earlier.

UBS fell 1.66 francs to 35.22 francs in Zurich, valuing it at about 76.7 billion francs. The company lost more than half its value in the past 12 months, making it the fifth-worst performer in the Bloomberg Europe Banks and Financial Services Index of 59 stocks. Deutsche Bank AG cut UBS to ``hold'' today, with a note entitled ``good news already in the price.''

Slimmer Securities Unit

Rohner, 43, and Kurer, 58, told shareholders last month they plan to slim down the securities unit while focusing on the ``core'' wealth-management franchise. The private bank had net new money inflows of 5.6 billion francs in the first quarter, while Swiss business banking and global asset management had 18.4 billion francs outflows.

Outflows accelerated towards the end of the first quarter and UBS remains ``cautious'' with regards to outlook for net new money, Chief Financial Officer Marco Suter said in an interview. He declined to say if clients added or pulled money in April.

UBS's asset-management unit has had four consecutive quarters of outflows as its funds underperformed comparable indexes. On a composite basis, the bank's global equity and global bond funds lagged behind their benchmarks over the past one, three and five years, UBS said in its quarterly report.

``We expect this difficult environment to remain and be characterized by a continuing unfavorable global economic climate, deleveraging by institutional and private investors, slower wealth creation and lower trading and capital market activity,'' Rohner and Kurer wrote today. ``The impact will affect all of our businesses and we are required to manage costs, resources and capacity very actively.''

Fixed-Income Cuts

The bank already eliminated 1,500 jobs in the investment bank at the end of last year. It brought in Jerker Johansson, 51, from Morgan Stanley as new head of the unit in mid-March and said last month it will put assets related to U.S. residential real estate into a separate unit that may be spun off later.

UBS plans to sell subprime and Alt-A mortgage assets to BlackRock by the end of June. Outside investors are committing $3.75 billion to the fund and will carry first losses, Suter, 49, said. ``These are highly professional investors,'' he said. ``It just shows you that they see profit potential.''

Most job cuts at the investment bank will be in the U.S. and London, and at all levels, according to UBS. About 26 percent of headcount will be reduced in fixed-income and 9 percent in investment banking and equities, Johansson said on a conference call, adding that real estate and securitization businesses will also see some of the largest headcount reductions. UBS is in talks to sell the municipal-bond business, he said, declining to name potential buyers.

`Lower Transactions, Commissions'

The securities unit, which at the end of the quarter employed 21,230 people, is targeting pretax profit of about 4 billion francs, down 28 percent from the level of 2006.

``In the coming quarters and potentially even years, the securities industry will have to live with lower transactions and lower commissions,'' said Paul Vrouwes, a fund manager at ING Investment Management who helps oversee about $23 billion, including UBS shares.

New York-based Citigroup Inc., which has suffered almost $41 billion in writedowns and losses from the subprime crisis, cut about 15,200 jobs and Merrill Lynch & Co. reduced 5,220 positions. Investment banks may have to eliminate as much as 35 percent of employees as leveraged lending dwindles and the pace of mergers and acquisitions slows, Kenneth Moelis, the former president of UBS's investment bank, forecast last month.

Ospel, Arnold

Chairman Marcel Ospel, who replaced half of the executive board since losses began in 2007, stepped down last month. The bank got shareholder approval to raise 15 billion francs through a rights offer after receiving 13 billion francs to replenish capital from investors in Singapore and the Middle East in March.

Some investors, including Luqman Arnold, a former UBS president whose London-based investment group holds more than 1.1 percent of the bank's shares, are demanding a split of the investment bank from other units. Rohner said today that UBS is committed to its integrated-bank model, although he wants each unit to be successful on its own.

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

Last Updated: May 6, 2008 12:29 EDT