UBS Reports Higher Client Outflows, Return to Profit (Update2)

Feb. 9 (Bloomberg) -- UBS AG, the European bank with the biggest losses from the credit crisis, said withdrawals by wealthy clients accelerated in the fourth quarter even as the company reported its first profit in more than a year.

The bank fell 5.4 percent in Swiss trading after saying net redemptions at its wealth management units increased to 45.2 billion francs ($42.3 billion) from 26.6 billion francs in the previous three months. Analysts surveyed by Bloomberg had estimated 17.5 billion francs in outflows.

UBS, based in Zurich, earned 1.21 billion francs in the fourth quarter, its first profit since the third quarter of 2008, helped by lower costs tied to the company’s debt and a tax credit. The bank is paying 2.9 billion francs in bonuses for 2009, up 34 percent from the previous year. Chief Executive Officer Oswald Gruebel said in a statement that the return to profitability “will increase clients’ confidence in UBS.”

“All divisions are profitable, and now UBS needs to work on its image and reputation so that clients’ withdrawals reverse,” said Teresa Nielsen, an analyst at Vontobel Holding AG in Zurich who has a “buy” rating on UBS. “It takes time.”

UBS shares fell 76 centimes to 13.40 francs in Zurich. They have fallen 17 percent so far this year, compared with an 11 percent decline in the 52-company Bloomberg Europe Banks and Financial Services Index. Credit Suisse Group AG has declined 13 percent this year.

UBS said it won’t pay a dividend for 2009.

More Outflows Seen

UBS may report its first annual profit since 2006 this year after spinning off $38.7 billion in assets into a central bank fund, cutting 18,500 jobs and appointing 11 new managers to the executive board. Gruebel, who has led UBS for almost a year, is relying on a recovery at the investment bank to help increase pretax earnings to 15 billion francs in three to five years.

Gruebel has said a return to profitability may help UBS stop withdrawals by wealthy clients, who removed a net 228.1 billion francs over the 21 months through December. The bank predicted today that withdrawals will continue in the “immediate future.”

Adviser Departures

Of the almost 90 billion francs in outflows from UBS’s wealth management and Swiss bank unit in 2009, about a quarter were tied to the departure of client advisers, Chief Financial Officer John Cryan said at a press conference in Zurich. About 8.5 billion francs of the withdrawals were related to an Italian tax amnesty, 6.3 billion francs resulted from UBS exiting the U.S. cross-border business and 5.1 billion francs were tied to the sale of its Brazilian Pactual unit.

The wealth management and Swiss bank unit’s pretax profit more than doubled to 1.11 billion francs in the quarter as a charge to settle a U.S. lawsuit wasn’t repeated. Wealth management Americas had a profit of 178 million francs, compared with a loss of 444 million francs a year ago.

The Swiss administrative court last month blocked the government from passing data to U.S. authorities on certain UBS accounts, endangering an accord reached last year to settle a lawsuit against the bank related to alleged tax evasion by American clients.

Swiss Justice Minister Eveline Widmer-Schlumpf said on Jan. 27 that the government will work with the U.S. to save the deal. Also at risk is the deferred prosecution agreement that UBS signed in February 2009 to avoid criminal charges, she said. A criminal prosecution in the U.S. could lead to the bank’s insolvency and endanger the Swiss economy, the government said.

‘Alternative Mechanisms’

“We are confident that the Swiss and U.S. governments will undertake cooperative discussions, as required by the settlement, to find alternative mechanisms for fulfilling the parties’ obligations, and we are fully supportive of these efforts,” Gruebel, 66, and UBS Chairman Kaspar Villiger, 69, said in a letter to shareholders.

Switzerland’s tradition of banking secrecy has also come under attack by Germany, where the government has said it may buy stolen Swiss data to go after possible tax cheats.

“If governments are in the market, as is the case in Germany, to buy illegal data, that changes the world,” Gruebel told analysts and journalists in Zurich. He said UBS doesn’t know whether any of its clients are on any disk being offered for sale to Germany.

UBS’s investment bank posted pretax profit of 297 million francs, its first since the second quarter of 2007, as charges on UBS’s own debt fell to 24 million francs from 1.62 billion francs a year ago. Analysts had forecast charges of about 750 million francs. Earnings in asset management rose 20 percent to 284 million francs.

Higher Bonuses

UBS will pay out 2.9 billion francs in bonuses for 2009, Andreas Kern, a spokesman for the Zurich-based bank, said by phone today. That compares with a 2008 payout of 2.16 billion francs in variable pay to staff, excluding U.S. brokers.

Gruebel, who isn’t getting a bonus, vowed to stick to a policy of paying market-level compensation since joining the bank almost a year ago. UBS last year boosted salaries for senior bankers at its securities unit by an average of 50 percent to increase the proportion of fixed pay.

UBS slashed 2008 bonuses 78 percent after a net loss of 21.3 billion francs, a record in Swiss corporate history, and a 6 billion-franc lifeline from the Swiss government to help it spin off toxic assets into a central bank fund.

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