ZURICH (Emma Thomasson) - UBS looked to put the financial crisis behind it on Tuesday, with money pouring into its core wealth management arm in the first quarter and its struggling investment bank doing better than expected.
Inflows of 11.1 billion Swiss francs ($12.6 billion) -- the highest since the end of 2007 and outstripping forecasts -- showed client trust was returning, the Swiss bank said.
Clients had withdrawn nearly 400 billion francs from the world's second-largest wealth manager in recent years after it was bailed out following huge writedowns on toxic assets and was hit by U.S. charges that it helped wealthy Americans dodge tax.
UBS said it had had strong inflows in the Asia Pacific region and emerging markets as well as from the ultra wealthy, although it continued to see outflows in Europe, where countries have been chasing tax evaders using secret Swiss accounts.
Vontobel analyst Dirk Becker said the biggest positive was the wealth management inflows: "This ... shows that UBS has now left the crisis behind even in this division, where client trust and confidence were shattered."
UBS expected sustainable inflows from now on, outgoing chief financial officer John Cryan told an analyst conference call.
UBS shares were up 5.7 percent to 17.53 francs by 1045 GMT, while rival Credit Suisse -- which reports quarterly earnings on Wednesday -- rose 2.1 percent to 39.66 francs, compared to a 0.7 percent firmer European banking index.
FIXED INCOME IN FOCUS
UBS reported a pretax profit of 835 million francs at its investment bank, up from 100 million the previous quarter, performing well versus its peers in fixed income -- where U.S. rivals have struggled -- and in equities trading.
But the bank did slip up in equity capital raisings -- traditionally one of its strongest businesses -- after the division was among the worst hit by departures, including that of global capital markets head Matthew Koder.
Chief executive Oswald Gruebel's plans to turn around the investment bank -- which made the massive losses that almost felled UBS -- are under scrutiny after an exodus of top bankers.
"It was a decent result in investment banking which should reassure after the headcount turbulence of the last few months," said Matthew Clark, analyst at Keefe Bruyette & Woods.
UBS said it expected to see some improvement in parts of the investment bank, despite constraints imposed on some of the fixed income currencies and commodities (FICC) businesses by a focus on controlling risk. It also noted the competition for staff and base salary increases will increase costs.
U.S. bank results showed fixed income profits falling from an unusually strong first quarter of 2010, while Goldman Sachs warned of layoffs if trading volumes do not pick up and said investors are holding their money close.
UBS said the disaster in Japan, unrest in North Africa and the Middle East and the ongoing euro zone debt crisis had dampened usually strong first-quarter client activity.
The bank said it expected second-quarter equity market trading volumes to stay around the levels seen in the first quarter, which should support transaction-based income in wealth management and flow trading in the investment bank.
It expects short-term interest rates in the West, including Switzerland, to remain low, continuing to constrain interest margins, although wealth management's gross margin on invested assets rose by 6 basis points to 98 basis points in the quarter.
Florian Esterer of Swisscanto, which holds more than 9 million UBS shares, said the bank should benefit more than peers from the shift from offshore to lower margin onshore business.
"Longer-term we expect the margin headwind to be more of an issue for Credit Suisse than UBS," he said.
REGULATORY PRESSURE ON TARGETS
Gruebel said the quarterly result was satisfactory but still fell "short of our overall ambitions."
Sarasin analyst Rainer Skierka said the figures might counter recent doubts in the market about Gruebel's mid-term target for a pretax profit of 15 billion francs -- including 6 billion from the investment bank.
"However, even after a rebounding first quarter there is still a long way to go especially in investment banking where a high compensation ratio remains a hot topic," Skierka said.
CFO Cryan said UBS was not deviating from those targets today but said the bank was carefully assessing the impact of new regulation, most notably on the capital-intensive FICC business, although it was too early to say what it might do.
Gruebel has said stiff Swiss capital standards -- which the government sent to parliament last week and could be approved this year -- could force UBS to move units abroad.
UBS said it was monitoring the effect of new rules in Switzerland, Britain, the United States and elsewhere on the corporate structure and would take action when needed.
UBS is not paying a dividend for 2010 or for some time to come as it retains earnings to meet the tough new requirements.
(Additional reporting by Martin de Sa'Pinto in Zurich, Edward Taylor in Frankfurt and Sarah White in London; editing by Alexander Smith)
($1 = 0.8843 Swiss franc)
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