UBS's Gruebel needs more time as clients pull money

The bank on Tuesday reported its first net profit since Gruebel, who had nursed rival Credit Suisse back to health, took the helm a year ago after UBS suffered the biggest annual loss in Swiss corporate history in 2008.

But UBS clients withdrew a hefty 56 billion francs, up from 37 billion in the third quarter and confounding analysts' expectations that outflows would slow after the bank settled a bitterly contested U.S. probe into help it had offered rich Americans to dodge taxes.

UBS, left damaged by the tax row and the credit crisis, has struggled to win back clients and investors, particularly as the U.S. settlement is now in question and the Swiss banking industry's culture of secrecy remains under attack.

Cost cuts and resilience in the investment bank's advisory and underwriting business but did not compensate for the torrent of client money outflows, said Helvea analyst Peter Thorne.

"These factors are overshadowed by the awful outflows from the wealth management unit and the prospect of more to come because of client advisers leaving and the worsening newsflow over Swiss bank secrecy and the U.S. tax case," Thorne said.

Pressure from an aggressive Italian tax amnesty in the final quarter of 2009 added to persistent brand damage that has hampered UBS's performance in the last two years.

"In the immediate future we still expect to report outflows," Gruebel and Chairman Kaspar Villiger - a former Swiss minister brought in to help clinch the U.S. tax deal - said.

Shares in UBS traded 2 percent lower at 10:55 a.m. British time, lagging a 1.4 percent rise in the DJ Stoxx European banks index <.SX7P> and 3 percent gain in Credit Suisse.

BACK TO PROFIT

UBS' fourth quarter net profit came in at 1.205 billion Swiss francs (722.6 million pounds), its first positive quarter after four negative ones, partly helped by one-off tax credits, lower-than-expected own credit charges and a cut in bonuses.

The figure was ahead of expectations of 326 million francs in a Reuters poll.

"They beat expectations but it looks like it was only because of non-operational items" said Kepler Capital Markets analyst Dirk Becker, noting margins were being eroded.

"The one big (thing) they achieved was to get back into profit in the fourth quarter, but it was expected."

UBS' investment bank, which had shown improvements in the previous two quarters, turned positive at pretax level with a gain of nearly 300 million francs after the bank cut its balance sheet by a further 11 percent and slashed personnel costs.

Gruebel said he expected the investment bank's performance to improve 2010, although this would depend on market swings. U.S. proposals to limit risk-taking by banks should have no or little effect on UBS, he added.

"The message there is that there is light in the market and we are enjoying our position while there is still light," Chief Financial Officer John Cryan told reporters.

U.S. TAX COMPLICATIONS

Complications on the U.S. tax probe after a Swiss court ruling in January and a smaller army of client advisors have set a potentially tough first challenge for Merrill Lynch veteran Robert McCann, who was hired by UBS in October to revitalise the scarred U.S. wealth franchise.

McCann has yet to unveil his strategy, while many analysts are betting Gruebel may end up selling the unit.

While the largest fourth quarter withdrawals were seen at UBS' key Wealth Management and Swiss Bank division, the Americas wealth division also came under pressure, suffering net outflows of 12 billion francs, more than twice analysts' expectations.

Cryan said the positive quarterly figures should encourage clients to stop taking money out of the bank, while Gruebel said he was confident the Swiss government would find "alternative mechanisms" to ensure the U.S. tax deal was honoured.

Pressure from the Italian tax amnesty launched in September and due to run until April added to UBS' woes, triggering net withdrawals of 8.5 billion francs.

UBS is facing a more competitive environment in the United States as the crisis led to the emergence of brokerage giants Morgan Stanley Smith Barney , Bank of America-Merrill Lynch and Wells Fargo .

Domestic competitor Credit Suisse, which has fared far better during the financial crisis, is expected to post a 1.3 billion franc quarterly net profit.

(Additional reporting by Jason Rhodes and Katie Reid; editing by John Stonestreet)