Oct. 17 (Bloomberg) -- UBS AG, Switzerland's biggest bank, had its so-called counterparty credit ratings put on watch for a possible downgrade by Standard & Poor's because of the company's earnings outlook.

``These rating actions reflect doubts about UBS's earnings capacity and franchise prospects in the challenging conditions that are likely to persist across its core markets in the medium term,'' S&P said today in a statement. The counterparty rating measures the Zurich-based company's ability to honor trades.

UBS has posted bigger losses than any European bank from the credit crisis. The Swiss government agreed yesterday to a $59.2 billion rescue plan that will provide the company with 6 billion Swiss francs ($5.2 billion) of capital and allow it to put as much as $60 billion of risky assets into a fund backed by the central bank.

``UBS has seen equity markets fall sharply and they are experiencing large client outflows,'' said Matthew Clark, a London-based analyst at Keefe, Bruyette & Woods Ltd. ``Neither of those are good for the earnings power of the business. Still, from a shareholders' perspective the deal they did yesterday was pretty good.''

S&P said it doesn't expect to cut UBS's counterparty credit rating by more than one step, which would take it to A+ from AA-.

``We can't comprehend it,'' UBS spokesman Dominique Gerster said in a telephone interview today. ``In our opinion, it goes against yesterday's announcement about risk-reduction plans.''

`Below Peers'

UBS fell 93 centimes, or 4.9 percent, to 18.16 francs in Zurich trading. The stock has slumped 61 percent this year.

``The rebuilding of UBS's reputation, crucial for its wealth management franchise, and restructuring of its investment bank are long-term processes, and we consider that there is potential for its underlying performance during this period to remain below peers,'' Standard & Poor's said.

The bank said yesterday that wealthy clients withdrew about 66 billion francs in the third quarter.

Switzerland became the latest country to rescue ailing financial institutions after losses on bad debts surpassed $650 billion globally and credit markets froze. The Swiss government plans to raise deposit guarantees and back the short- and medium- term interbank loans of the nation's banks, after countries across Europe took similar measures.

Wrong-way bets at UBS's investment-banking unit have led to $48.6 billion of credit losses and writedowns since the start of last year, data compiled by Bloomberg show. The bank has had to raise fresh capital three times in a less than a year.

Profitable 2009

UBS reported third-quarter net income of 296 million francs, after booking tax credits of 912 million francs. The bank will take a charge of about 4 billion francs in the fourth quarter from the government package, which will probably lead to a net loss, according to Chief Executive Officer Marcel Rohner. He reiterated yesterday that UBS expects a profitable 2009 and plans to pay a dividend for that year.

UBS investment bank's 2009 revenue will probably fall below 2002 levels, Morgan Stanley analysts Huw van Steenis and Carlos Egea said in a note to clients today. They also forecast ``continued outflows across the different wealth management businesses with recovery only in 2010.''

To contact the reporter on this story: Joyce Moullakis in London at jmoullakis@bloomberg.net; Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

Last Updated: October 17, 2008 14:09 EDT