UBS appeared to put the financial crisis behind it, with money pouring back into its core wealth management arm in the first quarter, although its investment bank struggled to regain momentum.
The Swiss bank said inflows of 11.1 billion Swiss francs ($11.55 billion) -- which far outstripped forecasts after they were flat the previous quarter and following big outflows in the first half of 2010 -- showed client trust was returning.
The world's second-largest wealth manager has seen clients withdraw nearly 400 billion francs 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.
This (wealth management inflow) is the highest since Q4 2007 and shows that UBS has now left the crisis behind even in this division, where client trust and confidence were shattered, said Vontobel analyst Dirk Becker.
UBS shares rose 5.2 percent to 17.46 francs by 0709 GMT, while rival Credit Suisse -- which reports quarterly earnings on Wednesday -- rose 1.7 percent to 39.52 francs, compared to a 0.3 percent firmer European banking index.
We sense that a comparably weak Q1 result at Credit Suisse may lift UBS shares further, said Silvia Quandt research.
FIXED INCOME IN FOCUS
UBS reported a pretax profit of 835 million francs at its investment bank, up from 100 million the previous quarter, but down 30 percent year-on-year as revenues from fixed income currencies and commodities (FICC) fell 17 percent.
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 and an admission he underestimated the challenge of reviving fixed income.
UBS said it expected to see some improvement in a number of business lines in the investment bank, despite constraints imposed on some of the FICC businesses by a focus on controlling risk. It also noted the competition for talent and recent base salary increases will put some pressure on the cost base.
At U.S. rival Morgan Stanley investment banking was the biggest reason for a steep earnings decline in the first quarter, with fixed-income trading the main source of that drop although the results were better than expected.
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.
Some analysts have said Gruebel will have to abandon his target for a pretax profit of 15 billion Swiss francs from late 2012 -- including 6 billion from the investment bank, but he said last month he would only review the figures once there was more clarity on new capital rules.
Chief Financial Officer John Cryan told journalists on a conference call UBS was not deviating from those targets today although the bank would monitor the regulatory environment.
Gruebel has said stiff Swiss standards -- which the government sent to parliament last week and could be approved this year -- could force UBS to move units abroad.
We remain concerned that the international regulatory environment increasingly lacks consistency, Villiger and Gruebel said, adding they would monitor the effect of rules on the corporate structure and take appropriate 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.
($1=.9607 Swiss Franc)
(Additional reporting by Martin de Sa'Pinto in Zurich, Edward Taylor in Frankfurt; editing by Alexander Smith)