Aug. 12 (Bloomberg) -- UBS AG, Switzerland's biggest bank, plans to separate its investment banking and wealth management units after mounting subprime writedowns prompted rich clients to withdraw funds for the first time in almost eight years.

Chairman Peter Kurer said today the Zurich-based bank will give its three business divisions greater autonomy to increase ``strategic flexibility.'' The decision adds to speculation the company may jettison the securities unit after record losses, JPMorgan Chase & Co. analyst Kian Abouhossein said in a note.

Kurer yielded to pressure from shareholders including former UBS president Luqman Arnold to split off the investment bank, reversing his predecessor Marcel Ospel's almost two-decade push to expand the business. Clients of UBS's wealth management unit, described by the company as its ``core'' franchise, removed 17.3 billion francs more than they invested in the second quarter.

``They bought themselves some time,'' said Joerg de Vries- Hippen, who oversees about $26 billion, including UBS stock, as chief investment officer for European equities at Allianz Global Investors in Frankfurt. ``By separating the business units they are showing that they are listening to investors but not going as far as breaking up the universal bank business model.''

UBS fell 56 centimes, or 2.4 percent, to 22.62 francs in Swiss trading. The stock is down 51 percent this year, the fourth-worst performance on the 71-company Bloomberg Europe Banks and Financial Services Index.

`New Problems'

The bank reported a second-quarter net loss of 358 million Swiss francs ($329 million), compared with a 5.55 billion-franc profit a year before. About 3.8 billion francs in tax credits cushioned the loss.

UBS said it doesn't expect the ``adverse economic and financial trends'' that led to the quarterly loss will improve in the second half.

The bank's more than $43 billion of markdowns related to the subprime contagion trail only New York-based Citigroup Inc. and Merrill Lynch & Co. globally. Financial institutions worldwide reported about $500 billion of writedowns since the credit contraction began, and turned to investors for $353 billion of capital, data compiled by Bloomberg show.

``There are constantly new problems coming up at the investment bank and this is really taking a toll on the core wealth management franchise,'' said Florian Esterer, who helps oversee about $63 billion at Swisscanto Asset Management.

`Pressure' to Continue

Former chairman Ospel began expanding the investment-banking unit during his time at Swiss Bank Corp., one of the predecessor banks of the current UBS. In 1992, SBC acquired Chicago-based derivatives trader O'Connor & Associates and three years later snapped up London-based investment bank S.G. Warburg & Co. for 860 million pounds ($1.63 billion). In 1997, after Ospel rose to chief executive officer at SBC, the bank paid $600 million for Dillon, Read & Co., a small Wall Street investment bank.

The investment bank, run by Jerker Johansson since March, had a loss of 5.23 billion francs after about $5.1 billion in writedowns in the second quarter. The bank said it will continue to reduce staffing, costs and risky assets.

Pretax profit at the wealth management international and Switzerland unit fell 11 percent to 1.27 billion francs, while wealth management in the U.S. had a pretax loss of 741 million francs on provisions to settle a U.S. probe into auction-rate securities.

UBS's wealth management units, which oversaw 1.86 trillion francs at the end of June, had their first net outflow since the final quarter of 2000. The divisions attracted an average of 37.9 billion francs in each quarter last year. Net outflows from all the bank's money management units totaled 43.8 billion francs.

No Overnight `Fix'

``The measures we announced today will not fix our reputational challenges overnight,'' Chief Financial Officer Marco Suter said at a news conference. ``Therefore we expect the pressure on net new money to continue in the short term.''

UBS announced today that John Cryan, currently head of the financial institutions group at the investment bank, will replace Suter, 50, as CFO. Cryan advised ABN Amro Holding NV when the Amsterdam-based bank was taken over by a Royal Bank of Scotland Group Plc-led group last year. The bank hired Markus U. Diethelm, 50, from Zurich-based Swiss Reinsurance Co. as group general counsel, Kurer's former position.

Cutting Staff

CEO Marcel Rohner, 43, and Kurer, 59, previously announced plans to cut 5,500 jobs, including 2,600 at the securities unit. The bank said today it reduced staff levels by 2,387 people to 81,452 in the second quarter.

A mistimed bet on the U.S. mortgage market led to 25.7 billion francs of net losses, the most of any bank, in the past year. UBS raised more than 30 billion francs from investors to replenish capital.

Rohner, at the press conference, said he expects UBS to be profitable in 2009, and the investment bank to reach its earnings goal of 4 billion francs before tax next year.

Kurer said UBS is not for sale, nor are there ``specific plans'' to sell any units, he said. UBS wants to create greater flexibility by separating divisions ``because we don't know where the industry is going in the long term, and it's important that we can capture opportunities at the appropriate time in the appropriate form,'' Kurer said.

`Talent' Rushing Out

The company's private banking business has struggled to stem defections among advisers and wealthy clients, even as Zurich- based Credit Suisse Group AG and Julius Baer Holding AG have attracted more funds and stepped up hiring. UBS lost 140 client advisers from wealth management units in the quarter.

``Talent in private banking is rushing out the door to competitors who are taking advantage of the bank's difficult situation,'' said Bernhard Bauhofer, the founder of Wollerau, Switzerland-based consulting firm Sparring Partners GmbH and author of ``Reputation Management.''

UBS's management has also been grappling with regulatory probes in the U.S. The bank said last week it will buy back as much as $18.6 billion of auction-rate securities and pay $150 million of fines, the largest settlement in a U.S. investigation into whether banks stuck clients with hard-to-sell bonds. The bank set aside about $900 million in the second quarter to account for the settlement.

UBS is also under investigation in the U.S. over whether it helped clients evade American taxes. The bank said last month it will stop servicing accounts for American clients at units that aren't licensed in the U.S., in response to an Internal Revenue Service summons for customer information as part of the tax probe. The Swiss Finance Ministry is evaluating whether UBS should go along with the IRS's request.

`Substantial Progress'

UBS was among the first stung by the subprime contagion when its Dillon Read Capital Management LP hedge fund, run by former investment banking chief John Costas, 51, lost 150 million francs in the first quarter of last year. By May that year, UBS decided to close it, and in July CEO Peter Wuffli, 50, stepped down.

Losses also led to the departures of executives including finance chief Clive Standish, 55, and Huw Jenkins, 50, the head of the investment bank. Ospel, 58, resigned in April after shareholders demanded he take responsibility for the bank's woes.

Kurer, in response to criticism from investors including Arnold, 58, pledged to review the bank's business model and bring more financial experts onto the board of directors.

Arnold's Olivant Advisers Ltd., which holds a 2.78 percent stake in UBS, in a statement welcomed ``the substantial progress'' made by the bank. ``The new strategic direction signals flexibility and a strong commitment to shareholder value.''

UBS today said it will propose the election of Sally Bott, BP Plc's group human resources director, Rainer-Marc Frey, founder and chairman of Horizon21, Bruno Gehrig, chairman of Swiss Life Holding AG and William G. Parrett, former CEO of Deloitte Touche Tohmatsu to the board of directors.

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

Last Updated: August 12, 2008 13:21 EDT